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Luxfer Holdings PLCÂ (LXFR -1.12%)
Q3Â 2019 Earnings Call
Oct 31, 2019, 8:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning, my name is. Dorthy, and I will be your conference operator today. Welcome to Luxfer's 2019 Third Quarter Earnings Conference Call. [Operator Instructions]. After the speakers' remarks there will be a question-and-answer session. Now I will turn the call over to Cassandra Stanford, Luxfer's communication specialist.
Cassandra, you may begin.
Cassandra Stanford
Thank you, Dorothy. Welcome to Luxfer's third quarter 2019 Earnings Call. We're happy to have you all with us today. I'm Cassandra Stanford, and with me today is Alok Maskara, Chief Executive Officer. And Heather Harding, our Chief Financial Officer. On today's call, we will provide details on our third quarter 2019 performance as outlined in the press release we issued yesterday. Today's webcast is accompanied by a presentation that can be accessed at luxfer.com. Please note any references to non-GAAP financials are reconciled in the appendix of this presentation.
Before we begin a friendly reminder 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. Now let me turn the call over to Alok.
Alok Maskara -- Chief Executive Officer
Thank you, Cassandra. Welcome everyone. During our call today, I will provide an overview of our third quarter performance, an update on transformation plan progress, and an outlook for the remainder of the year. Please turn to Slide 3 for the summary of our performance. Third quarter 2019 financial results were a reflection of weak industrial macro conditions in the US and Europe which impacted our industrial segment sales. Demand for our SoluMag product typically used in fracking was notably lower.
As a reminder we had record SoluMag sales in the third quarter of 2018 creating tough comps for this quarter. In addition unprecedented storm-related flooding in the Midwest caused a temporary disruption at one of our graphic art facilities. Total sales excluding the impact of the non-core Czech divestiture declined 14.1%. Currency exchange rate created an additional 2.3% headwind. Because of lower sales our EBITDA declined 27% $16.7 million as we were unable to offset the gross margin impact of lower sales with cost reductions. Operating cash was also weaker, as we were unable to quickly lower inventory to match lower sales .
We have implemented aggressive plans to improve cash generation in the 4th quarter and beyond. Our balance sheet remains in great shape with a net debt to EBITDA ratio of 1.3 times. Our return on invested capital increased 220 basis points year-on-year to 18.6%. During the quarter, our cash outflow was $1.2 million as we used operating cash to fund $8 million in restructuring expenses. We expect Q4 cash generation to be stronger as we continue to adjust our working in response to lower sales. We continue to make good progress on our transformation plan to better position Luxfer for long-term success. As a reminder, one of our strategic initiatives is to streamline our global footprint. During the quarter, we completed the consolidation of our cylinder facilities successfully transferring all remaining production to our United Kingdom, Nottingham, and United States Riverside facilities from our friends factory, which was closed in the second quarter of this year.
Our net cost reduction for the quarter was $1.9 million, which was negatively impacted by storm water flooding related disruption and other manufacturing inefficiencies at our graphic art facility in Granite City, Illinois. We are continuing our restoration efforts and expect to fully overcome these inefficiencies by the end of this year.
On the organic growth front, we secured a $6 million form order for 2020 from the US government for our Magtech decontamination mit product, which will be manufactured in our recently expanded facility in Cincinnati. That facility is also one of the first to undergo a lean operational excellence transformation, creating the capacity required for this growth. We continue to roll out lean in our other facilities as well.
Now, please turn to Slide 4, where I will provide our perspective on the macro environment and its impact on our business. Our current sales can be classified into three approximately equal end markets; defense, first response and healthcare, transportation, and industrial. For Q3, 33% of our sales came from defense, first response, and healthcare end market. We have a strong customer value proposition in this market with the revenue stream that is driven by macro growth, replacement cycle, and consumables activity. Both the long-term and short-term outlook for this end market remains favorable.
As a reminder, this end market had strong growth in 2018, due to favorable macro conditions and because of large disaster release replenishment sales in the first half of 2018. As a result year-to-date 2019 sales in this market declined 13.8%. We have seen declines in SCBA sales, as delays in National Fire Protection Association certification have impacted key SCBA customers.
Lastly, we have started to exit lower margin fire extinguisher products in this segment. In this quarter 31% of our sales came from the transportation and market which consist of aerospace, alternative fuel trucks and buses, and passenger auto. As a reminder the Czech recycling business that was divested in the second quarter was serving the passenger auto end market. The numbers presented here exclude the impact of this divestiture.
While the passenger auto macro growth environment is challenging, the outlook for Aerospace and alternative fuel buses and trucks remains favorable. 2018 performance was largely driven by alternative fuel, share gain in auto catalyst, and a large OEM Superformed contract. For 2019, year-to-date sales grew 8.6%, as strong alternative fuels more than offset the decline in Superformed sales for European passenger auto.
Finally, 36% of the sales in the quarter came from industrial end market, where we continue to provide strong value proposition to our customers but sales have been negatively impacted by the broad based industrial slowdown in both US and Europe. For 2019, year-to-date total industrial sales declined 12.3% which includes a 10% decline in general industrial sales and an 85% decline in SoluMag sales, which faced very tough comps.
Now, please turn to slide 5 for SoluMag overview and outlook. Launched in 2015, SoluMag is a proprietary high strength soluble magnesium alloy developed specifically for making downhole oil and gas fracking tools that will quickly and safely dissolve after use. SoluMag is primarily used by independent service and solution providers to fracking operators.
It is used in frac balls for sliding sleeve operation and in dissolvable frac plugs used for plug and perf applications. This premium product exhibits significant technical differentiation and delivers a very strong value proposition to our customers. As a result, the sales of the product more than doubled every year from 2015 to 2018.
Earlier versions of our products were more suitable for the blackish water fracking wells. And in 2019 we launched a new version that also works for fresh water, especially in the Permian Basin. During 2019, some key customers are working through significant excess inventory of our product, except customer inventory has a result and substantially lower year-to-date sales.
Additionally, many customers are restricting cash investments in this difficult environment impacting further product penetration. We expect the destocking to be complete by the end of 2019. We remain confident in the value proposition and technical superiority of our product. We are continuing to strategically invest in the business to increase the coverage and penetration of our product and are optimistic that our new fresh water SoluMag product will achieve commercial success based on early customer feedback. However, we remain cautious with our planning assumptions for 2020.
Now please turn to Slide 6 for an update on Luxfer's transformation progress. Overall, we have delivered substantially on our transformation plan launched two years ago. We completed Phase 1 which was focused on simplification, and have made great strides in Phase II specifically executing productivity and culture enhancement initiatives. We have also moved into Phase III, which is focused on growth and continuous improvement.
Regarding the cost benefits of the transformation plan, we delivered $9 million in savings in 2018 and are on track to deliver additional $4 million to $5 million in savings in 2019. Going forward we expect to further reduce costs by $6 million to $7 million in 2020 and achieve our total costs reduction goal of $24 million by 2021.
On the investment side, the largest outflow of cash occurred in 2019 and is associated with the consolidation of our facility in France. We expect another $8 million to $10 million investment in 2020, followed by $2 million to $3 million in 2021. Overall, the transformation plan continues to have an attractive two-year payback.
Now let's turn to slide 7 for a review of Luxfer's long-term performance. 2018 was an exceptionally strong year for Luxfer. We grew EBITDA by $20 million through our efforts to deliver cost savings and drive top line sales. In 2018, we saw a record demand for SoluMag but a sharp reversal occurred in 2019 as customers walk through excess inventory.
Given current market conditions, our expectations based on where we sit today is that 2019 sales of SoluMag will be lower than the 2017 level. Despite lower sales of SoluMag we are pleased that all key financial metrics; revenue, adjusted EBITDA, adjusted EPS, and ROIC, are significantly higher in 2017 even though FX has been a net headwind over the past two years. This achievement is due to our unrelenting focus on cost and our commitment to nurturing organic growth through investment in innovation and enhancement of our go-to-market approach.
Post 2019 we expect to deliver improved earnings growth for our shareholders as we continue to see benefits from a multi-phase transformation plan. Now please turn to slide 8 for a review of how we are investing in our future growth.
As part of the transformation plan and Luxfer business excellence, we continue to plant seeds to accelerate Luxfer's organic growth. The three main areas of focus are increasing innovation, driving commercial excellence, and building growth talent. Delivering innovative new products that meet our end users need is part of our long-term sustainable competitive advantage.
As part of Luxfer's business excellence, we have introduced a more disciplined new product introduction process that allows us to deliver new products faster while ensuring that we focus on fewer larger projects that are driven by our customers unmet needs. As a result of these changes our revenues from new product introduced in the past five years is now at 15% compared to approximately 11% in 2016.
We aim to increase this number to above 20% by 2024. As part of driving commercial excellence, we have standardized and digitize our global sales process using Salesforce.com. This is allowing us to better understand our end user needs and make database decision for sales targeting and pricing. In addition, we have started using net promoter score process to increase customer retention and drive organic growth.
Our current net promoter score is 45% and we expect to drive a 10 point improvement to this score by 2024. Building growth talent is very important to us to accelerate our growth momentum and for succession planning. We have taken many steps, including de-layering the organization and appointing new more growth focused business unit leaders to improve our service to customers, we have also hired new operational talent who have the lean mindset to always put the customer first, which is one of our core values. now let me turn the call over to Heather Harding, Luxfer's Chief Financial Officer for details on our financial results.
Heather Harding -- Chief Financial Officer
Thank you Alok, and good morning everyone. Now let's turn to Slide 9 for a review of our financial results. Third quarter reported sales of $107.1 million declined 17%. Excluding the impact of the Czech recycling divestiture core sales declined 14.1%, including a 2.3% negative impact from FX and 3.1% impact of lower sales from superform. A substantial portion of the decline was due to lower oil and gas fracking activity impacting sales of SoluMag. Consolidated adjusted EBITDA for the quarter of $16.7 million was down $6.3 million or 27.4% versus the prior year.
Despite the volume decline, the company continued executing on the transformation plan and delivered $1.9 million of cost reductions. This brings our year-to-date total cost reductions to $3.6 million. For the quarter, gross profit margin decreased 280 basis points to 23.5% primarily due to the sales decline in SoluMag. Favorable pricing was slightly offset by higher total inflation, net cost reductions partially offset unfavorable FX and volume mix.
Now let's review the Elektron segment results on Slide 10. In our Elektron segment, sales of $52.9 million declined 20.9%. Excluding the divested Czech recycling business which accounts for $4.4 million, core electron sales declined 15.4%. The decline is primarily due to decreased sales in SoluMag and unfavorable FX, with partial offset from growth in meals ready to eat and chemical response kits. Segment EBITDA of $10.4 million declined $6.3 million or 37.7%.
For the quarter, the leverage on the volume decline was significantly impacted by the lower sales of higher margin SoluMag product. Unfortunately, the progress on net cost reductions was offset by inefficiencies from unprecedented storm-related flooding at our graphic arts facility in Granite City, Illinois, which we estimated to have had a $1 million impact associated with downtime and lost productivity, as well as repairs and maintenance.
Now let's review the Gas Cylinder segment results on Slide 11. Net sales for the Gas Cylinders segment declined 12.9% to $54.2 million including a 2.6% unfavorable FX impact. The volume decline is due to lower industrial aluminum cylinders and lower Superfoam sales partially offset by continued year-over-year growth in alternative fuel cylinders. Despite the sales decline, third quarter adjusted EBITDA remained stable $6.3 million. Strong execution on cost reduction initiatives delivered by the gas cylinders team offset the volume decline impact and unfavorable FX.
Now let's go to Slide 12, for a review of our key balance sheet and cash flow metrics. Net debt totaled $93.7 million at the end of the third quarter an increased from $79.8 million a year ago. As expected, our restructuring activities consumed approximately $8 million of cash during the quarter.
As a reminder, restructuring costs for the first half of the year were approximately $15 million. We expect to spend a much lower amount in the fourth quarter and are forecasting full-year restructuring costs of approximately $27 million in cash. As Alok mentioned, 2019 cost savings are expected to be $4 million to $5 million. Resulting net cash outflow before financing activities was $1.2 million.
While our restructuring spending was substantially in line with expectations, we were unable to manage the working capital as quickly as the quarterly volume decline. You can see that our working capital at the end of the quarter was up $6.7 million from the same period in 2018. We already put initiatives in place to improve working capital and deliver cash generation in the fourth quarter.
As such we expect to finish the year with net debt in the $80 million to $85 million range, equating to a net debt to EBITDA level of 1.2 times. Despite timing challenges impacting our working capital, on a trailing 12 month basis we delivered a strong ROIC from adjusted earnings of 18.6%. This represents a 2.2% improvement from the prior year. And now on to Slide 13 for an update on our annual guidance.
For 2019 we are now projecting adjusted EPS within a range of $1.41 to $1.47 versus the prior expectation of $1.66 to $1.72. This has been a challenging year given the dynamic macro environment and speed of change. We remain cautious on industrial demand in oil and gas markets. We expect the destocking of SoluMag to continue through the end of the year. And more broadly, we're noticing weaker industrial sentiment as many of our -- many of our large customers are experiencing softness pointing to week order trends.
Defense remains strong and secular growth trend should support continued solid performance. Within transportation, sales into the aerospace applications remain resilient so we expect continued softness in Superform sales. In addition, we expect the recent bankruptcy and sale of our European customer Wrightbus to have a negative short-term impact on our alternative fuel cylinder sales.
Now let me turn the call back over to Alok.
Alok Maskara -- Chief Executive Officer
Thank you, Heather. Please turn to slide 14. Improving our corporate governance has been a focus of mine since I took over as the CEO. I'm happy to report that Luxfer Board transformation is now complete.
The addition of Lisa Trimberger, retired partner from Deloitte & Touche in September, 2019, marked the completion of our board rejuvenation process. Along with Lisa Trimberger, in the past 12 months we have added two additional independent directors, Dick Hipple, Retired Chair and CEO of Materion and Allisha Elliott, current Chief Human Resources Officer, of Sensata Technologies.
These changes to the Board have added meaningful relevant experience to support our long-term vision which includes driving simplification and adding growth talent. All new Board members have also brought significant US public company experience.
Not only have we added new Board talent, but we have also instituted and updated our policies and governance to ensure Luxfer meets or exceeds current best practices for our NY:SE listed company.
Finally, management compensation has been modified to align with shareholder interest. These positive changes resulted in management securing a 97.6% shareholder approval vote in the 2019 Annual General Meeting compared to 86.8% in 2018.
Now let us turn to slide 15 for a summary of the long-term opportunity at Luxfer. While we continue to navigate the choppy and challenging macro environment that has impacted our 2019 performance, our management team and our Board remains confident in the long-term opportunity at Luxfer.
While the industrial outlook remains uncertain and the US fracking end market may remain difficult, we take comfort in the fact that our exposure to the fracking end market is now less than 2% of our revenues.
The defense end market remains stable and we no longer face difficult comps related to 2017 and 2018 disaster relief sales. We are also pleased with the recent award of the US government contract for the decontamination mid-product.
Our cost transformation efforts continue to pay off and we still have an additional $10 million in savings to be delivered over the next two years as part of our $24 million in total cost savings keep in mind that the majority of our restructuring expenses and cash cost to achieve the savings is in 2019 and future cash spend is relatively less. Our balance sheet and cash conversion capability remains strong providing us future flexibility to deliver additional value to our shareholders.
Now please turn to slide 16 for a wrap up. Let me wrap up by recapping that we serve niche attractive end market with proprietary products and technology. Our transformation plan has delivered results and will continue to generate positive impact for the next few years.
After the transformation plan is complete, we still have plenty of runway for more shareholder value creation by deploying the Luxfer business Excellence standard tool kit to drive continuous improvement in growth and productivity. I want to thank all our employees around the world for the hard work and 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 comes from the line of Chris Moore with CJS Securities.
Chris Moore -- CJS -- Analyst
Hey, good morning guys.
Heather Harding -- Chief Financial Officer
Good morning Chris.
Alok Maskara -- Chief Executive Officer
Good morning Chris.
Chris Moore -- CJS -- Analyst
Good morning. Yeah, maybe just stay with SoluMag for a moment. So can you may be estimate what the potential addressable market could be in fiscal '20 for SoluMag?
Alok Maskara -- Chief Executive Officer
You know, Chris, the -- addressing the market remains pretty high. And as you know, we have a small penetration and small share in that. Because in the past years, we have estimated the addressable market to be about in the $250 million to $300 million range. And I think that number is going to still hold approximately true. As we look at majority of the market is covered by the non-soluble products and what we are looking at is increasing the penetration of soluble products. I'm not sure that I answered your question, but I think...
Chris Moore -- CJS -- Analyst
[Speech Overlap] Yes. No, I think that's helpful. You -- In the presentation, you talked about opportunity with new partners and customers. Are those kind of similar independent operators and is it the new product that's allowing you availability to them?
Alok Maskara -- Chief Executive Officer
Yeah. So the new products, one of the big thing about it is it allows better usage in the Permian Basin, which is where a lot of the activity is focused versus the older generation product was used more in the Balkans and were taken to more blackish water pieces.
They are -- they remain kind of similar kind of customers, which are smaller independent providers. But at the same time we are having conversations with the larger player as well given the state of the market and where our current sales situation is.
But our current customers have remain to be smaller independent ones. And as you know, they are the ones who have faced more cash crunch or cash difficult situation this year.
Chris Moore -- CJS -- Analyst
Got it. In terms of a new product development, it sounds like the focus is on fewer larger products that are a better fit. Is there any examples that you can give or specific areas that you can talk about?
Alok Maskara -- Chief Executive Officer
Sure. In addition to alternative fuel which we highlighted earlier, which is essentially a new type of cylinder and the capability to put it together into a bus system is also new which we do count as part of the new product. The second one that I would highlight would be on our zirconium side.
The zirconium side on the automotive side, we've talked about gas particulate filtration and that remains a continued growth and exciting growth opportunity for us. Because that's also favored in the macro environment as emission regulations get tighter.
I would also highlight like you know we have newer zirconium industrial catalyst products that are used in coating and we are optimistic about more growth in that next year as well.
And then lastly, of course, on the Magtech side as I talked about the decontamination mint and order that we have secured, which is essentially a product line that has been rejuvenated with the new orders and new innovation. Particularly that's another exciting opportunity for us as well.
Chris Moore -- CJS -- Analyst
Got it. Helpful. Last question, just in terms of -- historically, we had talked about 8% to 10% EPS growth over the next couple of years. So obviously '19 is a difficult year it's not going to happen.
The question is in terms of what's the possibility that there could be some catch-up in fiscal '20? What would have to happen is that dependent on a little bit of a resurgence in SoluMag or are there other things in the mix that could do that?
Alok Maskara -- Chief Executive Officer
You know, I think probably depends on the macro more than on any individual situation. As we said, we remain confident in the value proposition of SoluMag and we would need the financial situation there. But honestly looking beyond SoluMag -- because as you mentioned its less than 2% of our revenues now. The uncertainty in my mind is all external macro phasing as to where does ISM go, where do the overall trade wars lead us to internally, we remain confident in our capability to deliver the cost savings to deliver the new products and to be able to continue expanding geographically as well.
But as you can imagine, in today's environment it's just hard to give a concrete answer on any 2020 outlook.
Chris Moore -- CJS -- Analyst
Understood. I appreciate it guys. I'll jump back in line.
Operator
Your next question comes from the line of Michael Leshock with KeyBanc Capital.
Michael Leshock -- KeyBanc Capital. -- Analyst
Hey, Alok and Heather, good morning.
Alok Maskara -- Chief Executive Officer
Good morning, Michael.
Heather Harding -- Chief Financial Officer
Good morning.
Michael Leshock -- KeyBanc Capital. -- Analyst
So first I just wanted to get an update on the SCBA business given the timing with the order deferrals. How much of those orders were pushed back into -- and they will be seen in 4Q versus being pushed into 2020?
Alok Maskara -- Chief Executive Officer
Michael, so there's definitely delays and, I mean, if you look at some of our core customers and their own earnings call we think those orders take the next 2 to 3 quarters to come back. So I don't think they are lost by any standard. Some of this is a very good business and orders are quite far. But the delayed standards approval would probably mean it's going to be, some in Q4 and some in 2020 .
Michael Leshock -- KeyBanc Capital. -- Analyst
Okay. And then just looking at the impact from the recent GM strike on your auto business. Could you talk about the the magnitude of the impact you've seen from this and how that compares to the impact that you've seen from more of the broader slowdown in China and Europe?
Alok Maskara -- Chief Executive Officer
Yeah. So from GM strike we have had minimal impact. That's not a huge are. The only impact there is a bit of slowdown in the auto catalyst. But given that we are gaining share and we've been strong there. That's less of an impact to us. The larger impact has been in the European slowdown.
The China market is again very negligible for us and the European slowdown is where the Superform sales have declined and that's also reflective of some of the pricing moves that we have made there.
I would probably come back and say the largest impact from the auto macro environment for us is European luxury sales which as you know has softened significantly for the past few quarters.
Michael Leshock -- KeyBanc Capital. -- Analyst
Got it. And then just as I look at the implied 4Q guidance, where do you expect the quarter over quarter downside to be most acute? Is there one thing that you think will impact results the most?
Alok Maskara -- Chief Executive Officer
Well, I guess one thing we should point out is there is a bit of seasonality where Q4 is always kind of one of our weak quarters and that's been for many years if we kind of strip out any exceptionals on that. But from kind of what impacted the Q3 results for us, we look at as going forward. Some of those factors remain the same, which is SoluMag, which is the Industrial/ISM decline. Where we expect probably additional impact in Q4 would be around some alternate diffused sale because of bankruptcy or one of our customers Wrightbus. I think Heather mentioned in her portion of the conference call.
Michael Leshock -- KeyBanc Capital. -- Analyst
Okay and then just lastly on the Granite City facility flooding. I think you said you expect to recover by the end of the year. Have you been able to reduce the late order backlog you have at that facility? And if not, how far has this flooding pushed you back?
Alok Maskara -- Chief Executive Officer
This is a facticius reminder of where we had consolidated production from Findlay, Ohio. And in Q2 we had reported that we made good progress and which is not true. The flooding happened in early Q3 and that did push us back. So the late order backlog while it gone down in Q2 went back up in Q3.
We do feel good about our ability to continue serving the customers, but that is causing some inefficiencies, including air freight, including higher labor hours, including higher scrap. So those are the inefficiencies. We're able to continue our customers and maintain good order levels.I would expect the late order backlog to go down to normal by the end of the year. But it's not normal right now.
Michael Leshock -- KeyBanc Capital. -- Analyst
All right, thanks.
Operator
[Operator Instructions] Your next question comes from the line of Sarkis Sherbetchyan with B. Riley FBR.
Sarkis Sherbetchyan -- B. Riley FBR, Inc. -- Analyst
Thanks for taking my question. Good morning, Heather and Alok.
Alok Maskara -- Chief Executive Officer
Hi, Sarkis.
Heather Harding -- Chief Financial Officer
Good morning.
Sarkis Sherbetchyan -- B. Riley FBR, Inc. -- Analyst
So just wanted to first start off on the gross margin level, it sounds like the bulk of the impact was driven by SoluMag any other kind of drivers in regards to the margin level? Whether it's from other components of the business. Can you kind of help me understand ?
Heather Harding -- Chief Financial Officer
Right. So SoluMag was the single largest impact to our gross margin. And as I mentioned, it was significant. You may recall that last year in 2018, Q3 was the largest quarter for SoluMag sales. So this is the -- from a quarter -- quarter-over-quarter versus prior year perspective, this is the largest hit that we've had all year.
So that was the single largest item. There wasn't -- there were as we mentioned some other products that had some volume challenges that would just impact the margin at a normal basis. But by and large SoluMag is the single largest item that impacted the deterioration of gross margin.
Sarkis Sherbetchyan -- B. Riley FBR, Inc. -- Analyst
Understood. So, in regards to kind of product mix nothing else really changed the margin profile. Is that correct?
Heather Harding -- Chief Financial Officer
Not of any substantial -- of note, other than obviously we did divest the Czech Republic magnesium recycling business and we call that out, so that have had a little bit of an impact. But nothing else really changed from a product mix perspective.
Sarkis Sherbetchyan -- B. Riley FBR, Inc. -- Analyst
Okay. I understood it. And I think if I kind look at just the SGA line, both year-on-year and kind of sequentially here, tremendous improvement. I guess, is that the right level to think about on a go-forward basis or is there anything unusual this quarter?
Heather Harding -- Chief Financial Officer
Certainly, as we've talked about, we have been accelerating cost reduction efforts in light of the current macro environment and some of the challenges that we faced, so we have been working on pulling any programs forward.
And looking at right sizing our fixed cost base. So there is nothing of note that I could point to to say that this isn't something to consider going forward, where we're pulling all the others that we can to deliver enhanced profitability.
Alok Maskara -- Chief Executive Officer
And if I could add on to that, Sarkis. One of the things to keep in mind is that the SGA is where you see management bonuses. Last year was good bonuses for the management, given the performance and this year is not going to be. So that's one difference when you look at year-over-year. That's part of our continued effort to align management compensation with shareholder value.
Sarkis Sherbetchyan -- B. Riley FBR, Inc. -- Analyst
Thanks for that. And in regards to kind of the R&D line, I think in previous comments you guys had kind of mentioned -- and to perhaps increase R&D and obviously be more strategic about it. Can you kind of give us a sense for the magnitude or level that you'd like to increase R&D relative to what we see today?
Alok Maskara -- Chief Executive Officer
Sure. And, Sarkis, I don't think it'd make a huge difference to our bottom line financials. And as we look at where we are -- we are right about 1% or so of total revenue in R&D. We have talked about that over the next five years, we would like to take it up to closer to 2% and that's necessary for us to drive 20% of our revenue from new products. I mean, thats -- you can think of it as -- like, 4-5 year investment cycle to go from roughly 1% to roughly 2%.
Sarkis Sherbetchyan -- B. Riley FBR, Inc. -- Analyst
Got it. Yeah. So it certainly seems pretty efficient in spend relative to the effort that you're attempting. Good. That's all from me, I'll hop back in the queue.
Operator
And there are no further questions at this time, I will turn the call back over to Cassandra Stanfield, I'm sorry, Stanford, for closing remarks.
Cassandra Stanford
Thank you for joining us today, and for your continued interest in Luxfer.
Operator
[Operator Closing Remarks]
Duration: 40 minutes
Call participants:
Cassandra Stanford
Alok Maskara -- Chief Executive Officer
Heather Harding -- Chief Financial Officer
Chris Moore -- CJS -- Analyst
Michael Leshock -- KeyBanc Capital. -- Analyst
Sarkis Sherbetchyan -- B. Riley FBR, Inc. -- Analyst
