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Luxfer Holdings PLC  (NYSE:LXFR)
Q1 2019 Earnings Call
May. 02, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Brandy, and I will be your conference operator today. Welcome to Luxfer's 2019 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'll turn the call over to Doug Fox, Director of Investor Relations. Doug, please go ahead.

Doug Fox -- Director of Investor Relations

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

Today's webcast is accompanied by a slide presentation which can be found on 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 will have -- we have reserved time for questions and answers.

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

Alok Maskara -- Chief Executive Officer

Thanks, Doug. Good morning, everyone. Thank you for joining us today. Please turn to Slide 3 for the summary of our performance for the first quarter of 2019.

Luxfer's first quarter's results show that growth momentum underlying our end-markets remains favorable. We maintained solid execution even in the face of some setbacks related to ongoing planned consolidations. We are continuing to drive high performance through our Luxfer Business Excellence Standard Toolkit known as Luxfer BEST with focus on commercial excellence, new product development, and lean manufacturing.

For the quarter, Luxfer reported sales of $120.4 million, up 0.6% from a year ago. Excluding a $4.4 million headwind created from unfavorable movements in FX, growth for the quarter was 4.3%. Quarterly adjusted EBITDA of $18.5 million was down 3.6% at the benefit of higher volume was offset by FX and temporary inefficiencies related to ongoing planned consolidations. Adjusted diluted earnings were up 8% to $0.40 per share driven by lower depreciation, interest and taxes (ph) .

Our net debt decreased $19 million or 20% from a year ago and increased from 2018 year-end due to seasonal increase in working capital, higher spending on our transformation activities, and higher bonus payouts. These higher cash needs contributed to an $11 million outflow of cash before financing activities. Q1 results give us confidence in achieving approximately 8% earnings growth for full year 2019. Momentum across our businesses remains favorable and we are on-track to deliver our previously announced total net cost savings goal of $24 million by 2021.

Now, please turn to Slide 4 for some color around our growth. Strong sales in zirconium-based chemicals and alternative fuel gas cylinders were partially offset by a decline in disaster release sales, as expected; and the impact of a strike at our French cylinder facility which is moving toward closure as part of our transformation plan. An ongoing favorable industrial macro environment and increased sales of new products and applications drove the growth in zirconium products. Robust autocatalysis sales was supported by our focus on gasoline-based vehicles in Europe and the U.S. In addition, we are using our expertise in zirconium-based autocatalysis to offer solutions in the field of gas particulate filtration. This is a significant growth opportunity within autocatalysis that is targeted to meet new particulate matter emissions standards globally.

For alternative fuel gas cylinders, higher volume from a European bus system assembly operations which was expanded last year drove the growth. The assembly operation builds value-added systems that incorporates cylinders, instrumentation and controls for bus manufacturers. We also continue to recover share in the U.S. by adding new customers for our innovative cylinder products, and through sharper, more focused sales execution.

Looking ahead, we are optimistic about driving higher future growth through recently streamlined joint ventures for gas transportation modules. In our Electron segment, sales of our Dissolvable SoluMag products were flat in Q1 as our key Oil & Gas customers are working through existing inventory. The timing of SoluMag sales was also impacted by the M&A activity of our customers and service partners. We remain bullish on the long-term potential of SoluMag which includes adding new customers and broadening our product offerings.

Now, please turn to Page 5 for an update on our Transformative Footprint Consolidation project. As a recap, over the past two years, we have successfully consolidated four facilities and our transformation plan has delivered $9 million in net cost savings in 2018. This quarter the net impact of our cost reduction activities was unfavorable as we incurred approximately $2 million in temporary inefficiencies related to the relocation of manufacturing facilities. These inefficiencies were limited to our gas cylinder facility in Gerzat, France; and our graphic arts facility in Madison, Illinois.

In Gerzat, we faced a strike in early Q1 following our Q4 announcement of a project to close the site. The strike resulted in manufacturing inefficiencies and disruptions in fulfilling customer orders. More recently, we have reached a mutual agreement with our employees which is now pending approval from local authorities. The site closure remains on-track for June 2019, and we are ramping up production at our existing site in the UK and U.S. to serve our global customers. The project we closed at Gerzat facility is both, complicated and difficult; yet we continue to believe that it remains in the best interest of our customers and our shareholders. Throughout the project we will remain focused on ensuring that we properly serve our customers with high quality products we are already manufacturing at other sites.

In the Madison facility for our graphic arts business, we faced some post-consolidation manufacturing start-up difficulties following the move of related operations from our Findlay, Ohio location in the fourth quarter. The consolidation resulted in temporary higher airfreight, scrap and overtime cost to ensure that we met our customer needs. More recently, production has stabilized and the team is running additional shifts to satisfy their late order backlog.

Overall, the inefficiencies we faced in Q1, should be substantially behind us by the end of the second quarter. And we remain on-track for delivering $24 million of net cost reductions by 2021. In addition, we have increased our manufacturing leadership talent to minimize disruptions during future moves.

Now, please turn to Slide 6 and let me turn the call over to Heather for a deeper review of the financial performance for the first quarter.

Heather Harding -- CFO

Thanks Alok, and good morning everyone. First quarter sales were up 26% to $120.4 million as price and volume offset the negative impact of changes that affect translation. The volume growth primarily came in two areas. Zirconium-based chemicals and alternative fuel gas cylinders. In zirconium, we maintain strong growth with our innovative offerings, both in auto and industrial catalysts applications.

For alternative fuel gas cylinders, we've benefited from European cities and others requiring the use of clean-burning compressed natural gas in efforts to reduce pollution, in city centers. Consolidated adjusted EBITDA totaled $18.5 million for the quarter, down $700,000 or 3.6% from the prior year. For the quarter, pricing all offset material inflation and a higher volume made a positive contribution of $1.2 million. Unfavorable effects reduced EBITDA by $0.5 million and as the load noted, temporary inefficiencies of approximately $2 million, offset cost reduction benefits for a net cost impact of $1.4 million in the quarter.

Please turn to Slide 7, for a review of our electron segment performance. First quarter sales for our electron segment increased 2.6%, primarily on the strength of zirconium-based chemicals even though SoluMag sales remain flat. Also for the quarter, we had approximately $3 million in lower shipments of disaster relief products, reflecting less replenishment needs from reduced hurricane activity. Despite this headwinds, segment volumes increased by $3.1 million. Sales also benefited from $800,000 in improved pricing.

Changes in currency rates, reduced sales by $2.3 million or 390 basis points. This lower level of disaster relief sales, will also have a similar impact on the second quarter results. As replenishment following the exceptional level of hurricane activity in 2017, extended through the first half of 2018. Segment EBITDA for the first quarter, increased $800,000 to $14 million or 6%. Pricing offset material inflation, the higher volumes and cost reductions, net of related segment and efficiencies, more than offset $400,000 of that tax headwind. Now let's look at the gas cylinder segment performance on Slide 8. Net sales for gas cylinder segment were down 1.5% to $58.4 million for the quarter. Volume and price advanced a combined $1.2 million due largely to high growth and alternative fuel cylinders.

Sales declined for aluminum and composite cylinders, substantially due to production interruption in our French facility, which we estimate reduced shipments by approximately $2 million in the quarter. FX reduced sales growth by $2.1 million or 350 basis points. Quarterly adjusted EBITDA declines 25% to $4.5 million. Notably at the temporary costs of closing and relocating our facility in France outweighed cost reductions. We are pleased to reach an agreement on the terms and timing of the closure. The agreement now requires approval from local authorities.

Let's look at some other changes impacting the Q1 reported net income on Slide 9. For the first quarter of 2019, we incurred higher expenses in three areas. Namely restructuring, M&A and share based compensation. On restructuring, the $9 million of expenses primarily relates to the costs associated with the French facility closure. This project is the largest and most complex of the consolidations we are undertaking under our multi-year transformation plan. The charges are substantially related to employee severance costs and site decommissioning.

For the quarter, we incurred $4.6 million in costs related to the Neo transaction, including $3.5 million for reimbursing Neo's transaction related expenses for the mutual termination agreement. These charges are in addition to the $3.7 million incurred in the fourth quarter of 2018 for a total of $8.3 million in expenses related to the terminated Neo transaction. Most of the cash outlay for these expenses will occur in the second quarter of this year.

Share-based compensation charges increased to $2.6 million for the quarter, up from $0.5 million last year. This increase relates to ulta-vesting (ph) of executive compensation payouts driven by strong 2018 performance. In addition to these increases I've covered, depreciation of $3.4 million was $1.2 million lower than prior year due to a reduced level of capital spending in the past few years and asset impairments due to restructuring projects.

Now let's take a look at the key balance sheet and cashflow item on Slide 10. Net debt totaled $78.4 million, down from $97.8 million at the end of the first quarter last year and up from $63.3 million at the end of 2018. In addition to funding our transformation, we had an increase in working capital in advance of potential Brexit. The first quarter also typically had greater cash needs for bonuses, employee taxes and related items.

As a result we had a net cash outflow before financing activities of $11 million. For 2019, we currently expect net debt to remain flat to prior year as operating cash will be used to fund transformation needs. As a reminder 2019 requires the largest cash outlay for a multi-year transformation plan. These results do not diminish our commitment to delivering on our goal of 100% cash conversion for the company. We expect to return to positive cash generation in the second half of this year. Even with the increase from year-end, working capital as a percent of sales, at the end of the first quarter was still below our performance at the end of the same period in 2018. In addition ROIC from adjusted earnings on a trailing 12-month basis was up significantly from 12.7% 19%.

Now let me turn the call back over to Alok.

Alok Maskara -- Chief Executive Officer

Thanks Heather. Please turn to Slide 11 for an update on Luxfer's strategy. Over the past two years, Luxfer has made significant progress on its transformation plan and we expect to continue generating 8% to 10% earnings growth over the next three years. This earnings growth will come from three strategic initiatives. First we will deliver the remaining $15 million, out of a total $24 million in cost reductions even though the net savings in 2019 will be lower due to temporary inefficiencies related to planned relocations. We are well on track to achieve this goal with other planned actions following the completion of our French operation consolidation.

Second, we will drive higher performance through our Luxfer BEST operating system to deliver growth and higher productivity through continuous improvement. Recent progress on Luxfer BEST includes cultured training for the company's top 50 leaders and the recruitment of six new plant managers who have expertise in implementing and leading lean manufacturing. Third, we will continue optimizing our portfolio and effectively deploying capital to maximize shareholder value. We are making good progress on the divestiture of our magnesium recycling operation and expect to announce a transaction soon. We are confident that we have a good M&A process in place and are currently refreshing our pipeline.

Now please turn to Slide 12. We experience favorable momentum across much of our businesses in the first quarter of 2019 and we continue to gain incremental share by serving more of a customers need through innovative products and system such as our zirconium products for gas particulate filtration and our alternate fuel bus systems. In the second half of this year, other innovative products to ECLIPSE SCBA high pressure cylinder will strengthen our market position.

At the same time, we will continue to eliminate negative margin businesses to improve our bottom line. Equally important, we are making good progress on long term business, cultural and footprint transformation that will lead to sustained GDP plus growth for the company. Beyond footprint consolidation, we are also enhancing our talent base most recently with the addition of several new plant managers, who are trained and experienced in lean manufacturing.

All of this gives us greater confidence in our ability to deliver higher value for our shareholders. Overall, underlying macro trends continue to support a favorable outlook and our strategy of developing a high performance culture is delivering results.

Please turn to Slide 13 for a recap of the key investment consideration for Luxfer. We serve attractive end markets with highly engineered industrial materials using our proprietary technology and manufacturing processes. We have a strong balance sheet and a solid track record of strong cash conversion and disciplined capital allocation. The Luxfer transformation plan launched 18 months ago is on track and has demonstrated early successes and we believe there are significant remaining opportunities for continued value creation at Luxfer. The best days of Luxfer are still ahead of us.

Lastly, I want to thank all our employees around the world for their commitment and hard work to drive continuous improvement at Luxfer. Thank you for listening. We will now take questions.

Question-and-Answer

Operator

Thank you. The floor is now open for questions. (Operator Instructions) And your first question is from Chris Moore of C.K.A securities.

Analyst -- -- Analyst

Good morning, guys. Thanks for taking a few questions. Maybe could you just provide a quick kind of update review of the key elements in the $24 million in cost savings and I think it sounds like this for facility to consolidate at this point time -- kind of how many to date, how many in total and any other kind of key areas that are driving the savings?

Alok Maskara -- Chief Executive Officer

Sure, Chris. So I think overall at our transformation plan, we think 60% or so comes from consolidation of facilities and margin improvement related to that and 40% comes from G&A. So far we have achieved $9 million dollars in 2018, so we have 15 to go. From a facility consolidation, we lifted to $4 million in the PowerPoint. If you look at France and Findlay which is under way and pick it up solidly on-track, that gets us to about $6 million and then we obviously are going to look at continued improvements on our facilities, but are not ready to announce any further project. At the same time, we are making good progress on overall G&A adoption as well which is out of the remaining 40% of the cost reduction. So we feel good on where we are despite the temporary additional cost we had to incur in Q1.

Analyst -- -- Analyst

Got any other plans that won't be the same scope as France, but it could have kind of similar issues in terms of the ability to smoothly close without some kind of push back?

Alok Maskara -- Chief Executive Officer

We don't think so. I mean in France obviously, there are different labor laws and we have to deal with different regulatory environment there as well. I mean that is the most complex and that's the one that I think the team is handling quite well in given the circumstances and some of the current challenges in France itself. But no, I don't think there's anything else in there. We look at all of these, have lessons learned and opportunities to do better and clearly with Jeff Moorefield now on board and looking at ensuring that we have more safety stocks, better planning. So we can obviously look at business, what can we do better in the future as well.

Analyst -- -- Analyst

Got it. Helpful. On the zirconium side, you talked about -- I know autocatalysis has always been a big opportunity, but it sounds like it's even becoming getting more into focus at this point time. Can you just talk a little bit about the opportunity there?

Alok Maskara -- Chief Executive Officer

Sure. And it has been a big opportunity, you're right. I think one thing that's helping is just the macro environment where while for example, auto sales in Europe are down. Put on the decline is essentially all limited to diesel-based vehicles and gasoline-based vehicles are doing well. We are fortunate that near 100% of our exposure is in gasoline-based vehicles. So the global macro environment is not working against us and in fact helping gasoline vehicles gain share verses diesel. Second, as we look at the loss shares in the past, based on our commercial excellence effort and some new products for new applications like a gas particulate filtration, we made solid progress in recovering our relationships with key customers out there. So, I think both of that makes us a little more bullish on autocatalysis going forward.

Analyst -- -- Analyst

Got it. Thank you. Last question. Just on the magnesium recycling divestitures. You said it's still on track for Q2. Is there any more specific you can provide there?

Alok Maskara -- Chief Executive Officer

No, it's a small divestiture as you know. I mean we have an agreement at this stage that we are working through the final due diligence steps. We remain cautiously optimistic about closing it before the end of the quarter. Probably at the tail end of the quarter. From an EBITDA perspective, our EBITDA is going to be near neutral. It's more about having the management and our teams more focused. And of course we got a bit of cash that we can use toward our transformation activities.

Analyst -- -- Analyst

Got it. Let me jump back in line. I appreciate it, guys.

Operator

(Operator Instructions) Your next question is from Phil Gibbs of KeyBanc Capital.

Phil Gibbs -- KeyBanc -- Analyst

Hi, good morning everyone. I just have a question in terms of the costs and efficiencies and maybe our previous, previous question tackled this, but trying to get a little bit more color. So are we to think that that $2 million dollars of impact will hang somewhat into the second quarter? Should we expect basically a repeat of Q1 in terms of those head ones?

Alok Maskara -- Chief Executive Officer

It would tend to be less than Q1, maybe $0.5 million to $1 million, $1.5 million in Q2. Obviously, we're working -- I mean, still early in Q2 and the team is very focused on minimizing that. And we have made an intentional decision not to call those exceptional charges because a strike was kind of a difficult situation. We think it's going to be less than $2 million, unsure. It's going to be that, it's going to be between $1 million to $2 million.

Heather Harding -- CFO

But yes, you are right. This is Heather. You're right to think there will be some hangover impact into Q2.

Phil Gibbs -- KeyBanc -- Analyst

Okay. And then and then related to just the cash spending for the restructuring plan and the acquisition of piece to neo, I think Heather, you said that that was $6 million in Q2. Any help you could give us on just the cash related restructuring expenses we should expect outside of our CapEx? So I think CapEx should still be around $20 million this year if I'm not mistaken, but what are the other big pieces to the cash number and where does the timing flow?

Heather Harding -- CFO

Right. So yes, we are expecting capital in that 2019 $20 million range for the year so that's not changed. When I think about timing and phasing over the year as we talked about in the presentation, based on the current plan with regards to France which is probably the biggest item that could swing some of the timing based on the current timing which is currently we're looking at a Q2 timing for that, we would not return to positive cash generation until Q3. If there is any slippage in the French project from June to July or anything like that, that could flip some of the cash between two and three. But at this point based on our current timing we're still expecting a cash out and that cash outflow in Q2 and then return to cash generation in Q3 and Q4. Other than the French facility and the acquisition expenses that we talked about, everything else is more kind of business as usual in terms of normal dividend, interest payments, tax payments, etcetera. There's nothing else unusual from a timing perspective.

Phil Gibbs -- KeyBanc -- Analyst

So you took the restructuring accrual in Q1, I think right of around $9 million dollars? So that cash outflow though will be in Q2, Q3 basically? And then you got the $6 million. So we're talking and we're talking about $15 million on roughly plus the CapEx?

Heather Harding -- CFO

That's roughly correct. We did have some restructuring accrual that we took in Q4. So again it depends on some of the timing of when all the approvals come through with the local authorities. So that's why again we're assuming Q2, it could push. We're a little bit at the mercy of when some of these approvals are obtained.

Phil Gibbs -- KeyBanc -- Analyst

Okay. And Alok, if you could talk a little bit about the SoluMag. It sounds like from your comments, a little bit heavy inventory right now which is not unlike what we're seeing kind of across the landscape right now to start the year. But I would think with strong completion activity in general and you know, your ability to gain new customers that maybe this is the low you know for you but maybe you could speak to that in terms of what you expect to see as the year progresses?

Alok Maskara -- Chief Executive Officer

Yes. You know, I'm hoping it's on the lower side. But as you know with the oil and gas it's really hard to get your arms around what's the actual consumption versus what's lying in inventory with the service providers. All indications are that right now they're just looking through excess inventory and yes we are optimistic that we can always get back to our growth's trends in that. We are very pleased with the expanding of our portfolio of products and getting higher penetration and that we are pleased with greater penetration within existing customers and looking at new customers, but the new customers start up just take us six or nine months to get fully on board. So. we don't think there's inherently anything that pulls us back on SoluMag, but honestly I was expecting a little better performance in Q1. So we need to take that with a grain of salt and keep watching the ordinate (ph) .

Phil Gibbs -- KeyBanc -- Analyst

Last question here is just the net cost savings. So you've got $15 million left to glean. You're actually a little bit behind right now obviously, with the start for the year on the near-term inefficiency, so it'll be incremental or even more from here. But as you look at the year on whole, how much are you expecting to still see some net cost savings this year or is it the growth basically just going to be driven by revenue? Thanks.

Alok Maskara -- Chief Executive Officer

Yes. As we look at our net cost reduction perspective and outlook for 2019, based on the temporary inefficiencies we're expecting around three-ish for 2019 as what we're expecting and building into our plans.

Operator

(Operator Instructions) There are no further questions at this time. I'll now turn the call back over to Doug Fox for any closing or additional comments.

Doug Fox -- Director of Investor Relations

Thank you. Thank you, everybody, for joining us today. Our next regularly scheduled conference call will be at the beginning of August for our second quarter earnings. Meantime, Alok, Heather and I will be around for any additional questions you might have. Thank you. Have a great day.

Operator

An entire recording of this conference call will available in about two hours. Telephone Numbers to access the recording will be available on the Luxfer website at www.luxfer.com. Thank you for joining us today. The next regularly scheduled call will be in August when the company assess it's 2019 second quarter financial results call. This ends the Luxfer's conference call.

Duration: 33 minutes

Call participants:

Doug Fox -- Director of Investor Relations

Alok Maskara -- Chief Executive Officer

Heather Harding -- CFO

Analyst -- -- Analyst

Phil Gibbs -- KeyBanc -- Analyst

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