Image source: The Motley Fool.
Luxfer Holdings PLCÂ (LXFR 4.15%)
Q2Â 2019 Earnings Call
Aug 1, 2019, 8:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning. My name is Stephanie, and I will be your conference operator today. Welcome to Luxfer's 2019 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.
Douglas A. Fox -- Director of Investor Relations
Thank you, Stephanie, and welcome. With me today are Alok Maskara, our CEO; and Heather Harding, Luxfer's CFO. First, Alok will provide a brief overview of the second quarter. Alok's remarks will be followed by Heather's review of the second quarter's financial performance. Alok will local then return for some closing remarks. 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-GAP 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 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 of the second quarter of 2019. Luxfer's second quarter results demonstrate the impact of successfully lowering our cost structure and increasing the operating leverage of our business. For the quarter, while sales were down 9% EBITDA margin increased 60 basis points and earnings per share was unchanged at $0.44. We achieved $3.1 million in cost savings during the quarter as we accelerated our transformation plan actions to mitigate the impact of sales decline.
The sales decline was largely the result of lower shipments of our SoluMag magnesium alloy products as oil and gas customers continue the destocking in the face of lower fracking activity. FX headwinds and reduced sales are Superform products also contributed to sales decline. As expected, we were a net user of cash for the quarter mostly for restructuring payments related to the closure of our French cylinder manufacturing side. Though we maintain a strong balance sheet with a net debt to EBITDA ratio at a modest 1.1 times and delivered better than 500 basis point year-over-year improvement in return on invested capital to 19.5%. We made excellent progress on our cost transformation plan to deliver net $24 million in cost savings by 2021. During the quarter, we completed the closure of our facility in France and successfully transferred production to our location in the UK and US.
In addition, we divested our Czech magnesium recycling operation. Achieving these major milestones, we further our journey toward simplified lead [Phonetic] in operations and enable future commercial excellence. Overall, we are pleased that we were able to maintain flat adjusted earnings per share despite significant challenges in our oil and gas end market.
Now please turn to Slide 4 for some color on the revenue drivers for the quarter. During the quarter, we saw continued growth in our Zirconium Catalysts product line. In addition to ongoing share gain in auto catalysts application, we also made further inroads into the area of exhaust gas Particulate Filtration with our innovative new solution.
On alternative fuel cylinders, we are pleased with the ongoing sales growth and order momentum. In Europe, we benefit when cities adopt clean burning natural gas and compressed hydrogen gas as a replacement for diesel for the heavy buses to reduce air pollution. In USA, we continue to reestablish ourselves with the new Type 4 cylinders and customer partnership while the CNG based heavy-duty truck applications. Luxfer is extending its leadership in this high-growth markets with our customer first orientation and a strong quality reputation. Our expertise played an important role in our selection as a partner in building the UK's first hydrogen power train, which was announced this past June.
Within gas cylinder, we are also anticipating good growth in specialty cylinders where our Eclipse product is opening doors to new applications and geographies. Pipeline for lightweight medical cylinders is also strong.
Sales for SoluMag products were lower in the quarter as customer destocking continues, but we remain optimistic in the long-term potential for SoluMag in fracking applications. As expected, lower shipments of disaster relief products relative to last year restocking post 2017 hurricane negatively impacted this quarter. Also in the second quarter, to perform sales decline as we continue to exit lower margin programs. We expect this trend to continue in the second half of the year.
Now please turn to Slide 5 for an update on a transformative footprint consolidation projects. We have made solid progress on simplifying our footprint to lower cost increased scale efficiencies and drive lean manufacturing excellence. This quarter we completed the closure of our cylinder manufacturing facility in France and successfully transferred production to existing sites in the US and UK to serve global customers.
The project to close the Gerzat factory was both difficult and complicated. And I wish to thank everyone involved. The move is clearly in the best interest of customers and shareholders and strategically position our global gas cylinder business for long-term success. As we mentioned during our first quarter call, our Madison facility for a graphic arts business encountered some post consolidation start-up issues, following the move of related operations from our Findlay, Ohio location.
We continue to make progress in reducing late order backlog to normal levels, and we're able to successfully sell the weekend friendly side in Q2. The inefficiencies we faced in Q1 are now substantially behind us. With the net cost reduction of $3.1 million achieved in Q2, we are now positive for the year and expect to deliver approximately $5 million in net cost reduction for 2019.
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 second quarter.
Heather Harding -- Chief Financial Officer
Thanks, Alok, and good morning, everyone. Second quarter sales declined 9.1% to $116.5 million, substantially on a reduction in volume as well as a $2.7 million headwind from FX. Favorable pricing partially offset the declines by approximately $1 million.
Consolidated adjusted EBITDA for the quarter of $20.2 million was $1.2 million or 5.6% down from the prior year. For the quarter, we improved gross profit margin increasing to 26.6% from 26.2% partly on the success of our transformation plan. Price and net cost reductions partially offset unfavorable FX, inflation and volume mix. With the $3.1 million in cost reduction in the second quarter, the cumulative amount for the first half of the year is approximately $1.2 million.
Now please turn to Slide 7, where you'll see a summary of our Elektron segment performance. Second quarter sales for our Elektron segment $58.4 million declined 13.9%, primarily on the reduction in SoluMag sales and disaster relief products, and partially offset by higher shipments of zirconium chemicals. Segment EBITDA declined $3.3 million to $13.1 million [Phonetic] or 20.1%. For the quarter, price and favorable net cost reductions partially offset the decline in volume as well as inflation and FX headwinds. Completion of the sale of our magnesium recycling operation occurred at the end of the quarter.
Now if you turn to Slide 8, you'll see a summary of our Gas Cylinders segment performance. Net sales for the Gas Cylinders segment were up 3.8% the $58.1 million is unfavorable FX and volume offset an improvement in price. Strong growth in alternative fuel cylinder sales offset the decline in Superform revenue.
Overall, business activity remains firm for cylinders. Despite the sales decline, second quarter adjusted EBITDA increased 42% the $7.1 million as favorable movements in price, mix and cost reductions more than offset FX and inflationary headwinds.
Now let's take a look at the key balance sheet and cash flow metrics on Slide 9. Net debt totaled $88.8 million at the end of the second quarter down from $94.6 million a year ago, but up from $78.4 million at the end of the first quarter.
As expected, funding needs included approximately $6 million related to the terminated Neo transaction, transfer the France closure in investments in our infrastructure supporting future growth. As a result we had a net cash outflow before financing activities of $5.9 million. Net of $5.8 million in proceeds from the sale of the Czech recycling operation and the friendly facility. We expect to return to positive cash generation in the second half of 2019, and remain committed to delivering on our goal of 100% cash conversion for the Company.
Working capital at the end of the second quarter was up around $1 million from the same period in 2018. In addition, ROIC from adjusted earnings on a trailing 12 month basis was up significantly from 14.4% to 19.5%.
Now let me turn the call back over to Alok.
Alok Maskara -- Chief Executive Officer
Thanks, Heather. Let's turn to Slide 10. In addition to announcing second quarter earnings, we are pleased to announce the addition of Lisa Trimberger to the Luxfer Board of Directors. We are pleased to add Lisa's talent and experience to Luxfer's Board. Lisa is a retired partner of Deloitte & Touche, after having worked there for over 30 years. She is now a Managing Member and Owner of Mack Capital Investments in early stage investment funds. Her broad professional career founds multiple industries, including significant manufacturing experience, with a strong background in audit and advisory roles, Lisa will further strengthen Luxfer's already strong Board. Her experience with M&A will also be very valuable to Luxfer. Upon joining the Board, Lisa will become a member of the Board's Audit Committee and Compensation Committee. With the addition of Lisa, the Luxfer Board transformation is now complete. Three of the five independent directors were added in the past 12 months and all three have significant US public company experience.
Now please turn to Slide 11 for an update on our earnings outlook. For 2019, we are now projecting adjusted earnings per share within a range of plus or minus 2% relative to 2018's $1.69 versus prior expectation of 8% EPS growth. We are concerned about the outlook for industrial, including oil and gas and that is around one-third of our total sales. We expect the destocking of SoluMag to continue through the second half of 2019. More broadly, we are noticing weaker industrial sentiments as many of our large customers are themselves expecting softness and are expected to become more cautious with orders and inventory levels.
At the same time, we continue to expect resilient in the rest of our business in defense and transportation. Core defense sales continue to remain robust and are not expected to be impacted by any economic slowdown. Within transportation, majority of our sales are in the aerospace applications and we continue to experience positive momentum in that space. Alternative-fuel sales in heavy-duty trucks and buses remained robust as well. Passenger big auto, which is less than 10% of our sales -- total sales is also showing resiliency as our content per vehicle is going up due to new applications and share gains.
As part of the transformation plan, exit from lower margin products and businesses is expected to negatively impact our second half revenue by about $13 million, but with zero bottom line impact. The sale of the Czech magnesium recycling business will reduce sales by approximately $8 million for the second half with the 12-month impact of $16 million. Additionally, decline in Superform revenues will reduce second half revenue by another $5 million. For the year, we expect to deliver about $5 million in net cost reductions. As a reminder, we achieved $9 million in cost reduction for 2018 to our cumulative total will be approximately $14 million by the end of this year, which is well on our way toward recognizing the full $24 million by 2021.
Now please turn to Slide 12. Overall, we have delivered substantially on the transformation plan that we launched just 18 months ago. Let me take a moment to highlight a few of these accomplishments. On July 1st this year, our share has joined the Russell 2000 after we eliminated our ADR structure and FPI status in 2018. While continuing to pay over $13 million in annual dividends, we have reduced our net debt to EBITDA ratio from 1.7 times in 2016 to 1.1 times [Phonetic] today. We have seven fewer facilities and have doubled our adjusted ROIC from 9.5% in 2016 to 19.5% now.
Please turn to Slide 13. Our long-term outlook remains firmly intact. We are confident in delivering 8% to 10% earnings growth over a cycle. We are well positioned as a leader in our served markets to generate GDP plus sales growth by providing customers with new products and improving our share through commercial excellence. After delivering $24 million [Phonetic] in net cost savings by the end of 2021, we are aiming to generate 2% to 3% annual net productivity through lean manufacturing and automation.
Now please turn to Slide 14. Let me wrap up by recapping that we serve niche attractive end markets with proprietary products and technology. We have a solid balance sheet with a demonstrated history of strong cash conversion. We will continue to deploy our capital to generate the best risk adjusted return for our shareholders. Our transformation plan has delivered results and we'll continue to generate positive impact for the next couple of years. After the transformation plan is complete, we still have plenty of runway for more shareholder value creation by deploying Luxfer best to drive continuous improvement in growth and productivity. I want to thank all our employees around the world for their hard work in making meaningful progress on our transformation plan and always putting our customer first.
Thank you for listening. We will now take questions.
Questions and Answers:
Operator
[Operator Instructions] Your first question is from the line of Chris Moore with CJS Securities.
Chris Moore -- CJS Securities -- Analyst
Hey, good morning, guys.
Alok Maskara -- Chief Executive Officer
Hi, Chris.
Chris Moore -- CJS Securities -- Analyst
Yes, good morning. Maybe just start on the cost savings side. So prior to this -- the timing had been $3 million in '19 and $6 million in '20, $6 million in '21, it's now $5 million in '19. Is that just kind of accelerate was going to happen in '21 or any thoughts in terms of the -- that relative balance between '20 and '21.
Heather Harding -- Chief Financial Officer
Hey, good morning, Chris. When -- as we looked at our performance in the second quarter and as we can see where some of the market indicators and market sentiments were going, we certainly look to see whatever we could accelerate and action within the quarter. So I think, if you go back to Q1 and relative to what we had said for the balance of the year we have increased our full year guidance a little bit and that really is kind of the timing between '19 and '20 I would say, we're still committed to the $24 million by 2021.
Alok Maskara -- Chief Executive Officer
I think one way to think about it, Chris, is that, we would still expect another $5 million [Phonetic] next year and then the remaining in 2021.
Chris Moore -- CJS Securities -- Analyst
Okay. That's helpful. And just in terms of the -- can you walk through the cash spend that you're talking about for the balance of 2019 and then to 2020. Just to make sure I have a good picture of that.
Heather Harding -- Chief Financial Officer
And I assume you're referring with respect to the restructuring program, Chris?
Chris Moore -- CJS Securities -- Analyst
Yes, exactly.
Heather Harding -- Chief Financial Officer
Yeah, yeah, exactly. So we had always said that 2019 would be a heavy year from a cash spend perspective, and we did spend a pretty significant portion in Q2 on the restructuring, and because of the French timing some of those payments are actually were expanded in July. So there is certainly some more to come out in that -- specifically Q3 in the back half. But from a cash spend perspective, we can think about a substantial portion here in '19, I'd say we're halfway done so we spent from a cash perspective about half of the restructuring dollars that we expected in '19 have been extended through the reported June results, and so the second half will be of a similar amount.
Chris Moore -- CJS Securities -- Analyst
Got it. Just last question, just with respect to SoluMag, it sounds like the inventory levels are coming down a little bit. Is there from what you're seeing in that market. Are there any new competitors that you're going up against in that space? Or it's just kind of purely a matter of oil prices and kind of the overall demand on that side.
Alok Maskara -- Chief Executive Officer
We have not seen any new competition or any change in the overall dynamics. We think it simply the impact of two things, I mean, slower upstream activities, especially in the difficult horizontal fracking in the brackish water where our products are applied for. And customers who had built an excess inventory last year. So as they expect a bit of slowdown, we feel double whammy of slowing demand and then excess inventory that needs to work through the customer stocking levels.
Chris Moore -- CJS Securities -- Analyst
Got it. All right. Let me jump back in line. I appreciate it guys.
Alok Maskara -- Chief Executive Officer
Thanks, Chris.
Operator
[Operator Instructions] Your next question comes from the line of Phil Gibbs with KeyBank Capital Markets.
Philip Gibbs -- KeyBanc Capital Markets Inc -- Analyst
Hey, it's Phil Gibbs. How are you?
Alok Maskara -- Chief Executive Officer
Good, Phil. How are you? Good morning.
Philip Gibbs -- KeyBanc Capital Markets Inc -- Analyst
Pretty good. Good morning. Spreads we're pretty neutral in the first half of the year. Are you expecting that to be the case in the second half as well?
Alok Maskara -- Chief Executive Officer
Yeah, I think we expect second half to be very similar when we look at spreads.
Philip Gibbs -- KeyBanc Capital Markets Inc -- Analyst
And I was reading the 10-Q filing last night and sales to Germany were down pretty substantially in the first half, I think $14 million from $21 million. What was that specifically tied to?
Alok Maskara -- Chief Executive Officer
Very specifically tied to our French factory shutdown as we move through like the shutdown face as you know there was significant disruption and early part of Q1 and a little bit in Q2. So we expect to recover out of that in the second half.
Philip Gibbs -- KeyBanc Capital Markets Inc -- Analyst
And in terms of the cash operating piece of restructuring. I think you mentioned some of that. I just wanted to reiterate what you said in about the year-to-date the spending there, Heather, and then what you expect in the second half?
Heather Harding -- Chief Financial Officer
Right. So on a year-to-date basis. If you look at both quarters we spent just under $15 million on total cash for restructuring. And to be clear, there is some of that -- that's in capital expenditures but it's a fairly small amount. So for the year we would expect that to be a similar amount in the second half. And again, it's more heavily weighted toward cash for restructuring as opposed to capital expenditures.
Philip Gibbs -- KeyBanc Capital Markets Inc -- Analyst
Okay. So thinking like something -- thinking about something close to $12 million or so for cash restructuring in the first half. And then a couple of million for capex and then the second half, something similar about there.
Heather Harding -- Chief Financial Officer
Yeah, it's less capital than -- it's less than that. So the 15 is total, think about maybe $1 million-ish for capital.
Philip Gibbs -- KeyBanc Capital Markets Inc -- Analyst
Also like 14.1 [Phonetic], and then you expect 14.1 in the second half or something like that?
Heather Harding -- Chief Financial Officer
Something like, yes.
Philip Gibbs -- KeyBanc Capital Markets Inc -- Analyst
Okay. So big --
Heather Harding -- Chief Financial Officer
So something weighted toward restructuring cash, not capital.
Philip Gibbs -- KeyBanc Capital Markets Inc -- Analyst
Okay. And given the weaker macro outlook. It just feels like there's a little bit more pull forward of some of these restructuring, some of those restructuring spend. Are you still anticipating the net debt to be at the same levels, it was at the end of 2018, or is that number going to be a bit higher?
Heather Harding -- Chief Financial Officer
Again, with our 100% cash conversion goal, it would be our intention that we will hold net debt flat to prior year.
Philip Gibbs -- KeyBanc Capital Markets Inc -- Analyst
Thank you.
Operator
Your next question is from the line of Sarkis Sherbetchyan with B. Riley FBR.
Sarkis Sherbetchyan -- B. Riley FBR -- Analyst
Hey, good morning. Hello Heather and Doug.
Heather Harding -- Chief Financial Officer
Good morning.
Douglas A. Fox -- Director of Investor Relations
Hi, Sarkis.
Sarkis Sherbetchyan -- B. Riley FBR -- Analyst
Thanks for taking my question. So it sounds like you're kind of concerned here on some of the industrial end markets. I think you specifically are calling out oil and gas. Just remind me, did you say it's the third [Phonetic] the sales metric?
Alok Maskara -- Chief Executive Officer
Yeah. Third of our total sales are in total industrial. Total industrial includes oil and gas that we reported. Oil and gases, it's only 5% of our total sales, but industrial is one-third total.
Sarkis Sherbetchyan -- B. Riley FBR -- Analyst
Got it. Okay. And then, you kind of called out resilience in defense and transportation. I guess, can you maybe talk about what you're seeing in defense and aerospace, maybe some of the growth in some of the alternative fuel category just -- is the growth in some of the other components enough to offset some of the other weakness that you've called out on a like-for-like business given the divestitures?
Alok Maskara -- Chief Executive Officer
Yeah, I mean, excluding the divestitures much more clearly show separately, I think 2019 that would be a challenge, especially on the margin side as the oil and gas business we have is much higher margin than some of the alternative-fuel and other growth areas that we are experiencing. So that's the reason we have to take our outlook out. But overall from a defense trend perspective -- in the current environment we see that business being very steady, and it's always been very reliable even in economic downturn. So I think that's something we feel confident about. An alternative-fuel continues to grow given by -- public bus spending in Europe mostly, that's both doing well. And aerospace remained steady as the new builds and everything else is pretty uniform.
In some of the uncertainty is just around what's going to happen to the broader industrial, while we haven't seen change in any order rate. So we do get concerned when IFM [Phonetic] falls from close to 60 to close to 50, and large customers like 3M [Phonetic] and others start talking about softness in their end market.
Sarkis Sherbetchyan -- B. Riley FBR -- Analyst
Understood. And that's helpful. And I guess just to kind of wrap up my line of questioning. I think, 10% of last year's sales were from new products. Can you speak about your traction with new products year-to-date. And where does your management team expect 2019 mix to shake out?
Alok Maskara -- Chief Executive Officer
I think we would probably end the year back at same number and that's because of SoluMag was part of our new products and that's take in our backward to turn this year because of destocking. So we probably -- earlier we would have expected that number to grow, but at this stage, I would say that from [Indecipherable] likely remain flat at the end of the [Technical Issues]. But in the long term, we still have confidence in getting that number up to 20% of sales.
Sarkis Sherbetchyan -- B. Riley FBR -- Analyst
Good. Thank you for that.
Operator
[Operator Instructions] There are no additional questions at this time, I would like to turn the conference back over to Doug Fox for closing remarks.
Douglas A. Fox -- Director of Investor Relations
Thank you very much for joining us this morning, Heather, Alok and I will be around for additional questions that you might have. We would look forward to talking with you again after our third quarter report, which will be at the very beginning of November. Have a good day.
Alok Maskara -- Chief Executive Officer
Thanks everybody. Bye.
Operator
[Operator Closing Remarks]
Duration: 30 minutes
Call participants:
Douglas A. Fox -- Director of Investor Relations
Alok Maskara -- Chief Executive Officer
Heather Harding -- Chief Financial Officer
Chris Moore -- CJS Securities -- Analyst
Philip Gibbs -- KeyBanc Capital Markets Inc -- Analyst
Sarkis Sherbetchyan -- B. Riley FBR -- Analyst
