Q3 2020 Luxfer Holdings PLC Earnings Call
Good morning, My name is Stephanie and I will be your conference operator today welcome to Luxfer Twentytwenty third 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 will turn the call over to marry we'd from Luxfer married. Please go ahead.
Thank you Stephanie welcome to look for third quarter 2020 earnings call. We're happy to have you are with us today.
I'm Mary read from Roxboro and with me today is a local Skara, Chief Executive Officer, and Heather Harding, our Chief Financial Officer.
On today's call, we will provide details on our third quarter 2020 performance as outlined in the press release issued yesterday.
Today's webcast is accompanied by a presentation that can be accessed at Luxfer dotcom. Please.
Please note.
Any references to non-GAAP financials are reconciled in the appendix of this presentation before.
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.
Please refer to the Safe Harbor statement on slide two of todays presentation for further details now let me turn the call over to a low.
Thanks, Mary Anne.
And welcome everyone.
I Hope you and your families remain healthy during these turbulent and uncertain times.
Before I discuss our would put quite a performance and provide an update on our transformation strategy progress.
I want a punk our 1500 employees our own the war for working hard to ensure the health and safety for all colleagues and their families while always putting customers first.
I'm proud of our team's discipline and did voluntarily hearings to operating procedures as we navigate the covert pandemics.
Why so Bruno end markets remain challenged we have been executing with agility.
As we lead calibrate our cost structure to current demand levels, while also positioning looks for to fully capitalize on recovery.
With that let me provide some highlights that sum up our quarterly performance and strategic focus.
First we delivered solid Q3 financial results despite challenging end market conditions, and we are seeing sequential improvements across our businesses.
Second we generally did really strong cash flow for their boot screen got already robust balance sheet.
This gives us greater optionality as we invest in organic growth enablers and pursue potential inorganic opportunities.
Todd we execute our transformation plan and made meaningful progress on initiatives to drive growth through new product development and commercial excellence.
I will provide more details on these teams and our CFO Andrew Harding will then review our financial performance in greater depth.
Shared guide for the remainder of 2020.
Now please turn to slide three for a summary of our third quarter financial results.
We delivered solid third quarter results as we address the impact of course, we'd really did macro conditions on our end markets.
A focus on controlling costs and driving free cash flow.
Two good seems off $90.4 million declined 15.6% on a year over year basis, but we saw sequential improvement compared to the 21.1% decline in the second quarter.
Third quarter, adjusted EBITDA of $14.2 million declined 15% helped by cost actions to mitigate the gross margin impact of lower volumes.
Our adjusted diluted EPS for the third quarter was 25 cents down 31% as compared to the prior year.
During the quarter, our focus on working capital resulted in $25.6 million of gas generation.
Including $1.4 million in cash restructuring expenses.
This enabled us to reduce our net debt to $59.3 million compared to net debt of $82.4 million at the end of the second quarter.
Our net debt to EBITDA ratio.
Improved to 1.1 time at the end of September which is significantly below our covenants.
Our balance sheet remains strong with additional liquidity from $150 million of an undrawn revolving credit facility.
Why didn't go through a lot of financial and strategic flexibility.
We are currently operating most of our facilities had to reduce capacity.
To serve the evolving needs of our customers and are encouraged by the sequential improvement in demand.
All our locations are operating with the traditional school would see God I.
<unk> as a number of positive cases continues to rise.
The health of our employees, our customers and our communities.
I mean, our number one priority.
Now please turn to slide four for an overview of how long before has adapted to the new normal.
What would the eight month since the covert pandemic began we have effectively adapted I'm in a we did better ways to serve our customers.
We have retooled all manufacturing operational procedures, we are.
I mean sure buttons on enabled remote work where possible to minimize the number of people in our facilities at any given time.
We continue to limit the number of visitors to our facilities why making squeeze math I'm solutia distancing mandatory for all personnel.
Some of them procedures are likely to result in more permanent change as we continue to adapt to an ever evolving external landscape.
If there is a silver lining the.
The pandemic allowed us to accelerate many of our lean initiatives and I believe not four will be better positioned to capture growth in the future.
Given the current environment, our customers are shifting preference you want to look at my supply chain.
Luxfer is a beneficiary of the ship as most of our manufacturing is in region for the region.
For example, U.S. based manufacturing generates greater than 90% of that sales in the U.S.
On a similar situation is true in Europe.
Lastly.
Brito remote connectivity allows for increased access to a broader talent pool.
Its physical locations become less relevant for certain growth and position.
We will continue to leverage the skills and talent for discourse workforce, even after the pandemic.
Let's now review our revenue performance by end market on slide five.
As a reminder, our current sales can be classified into three approximately equal end user markets.
Defense Force response in health care.
Transportation, which is a combination of alternative fuel aerospace and automotive.
And general industrial.
Before we review the performance of each let me give you a sense of the shifting demand patterns, we saw during the quarter.
They were also gradual sequential improvement in sales after the very low levels experienced in April and May.
Order rates continue to improve modestly in July and August, but plateaued in September, especially in the U.S.
Two factors that maybe impacting order patterns or uncertainty surrounding U.S. elections, which would be typical for defense orders.
And the recent uptick in corporate cases across the country.
We are closely monitoring our order rates and we'll adjust cute additional countermeasures if business conditions do read.
In the defense forces, both in health care markets.
<unk> declined roughly 8% for the third quarter.
We saw increased demand for our disaster relief, Florida, and chemical responds kids.
That was offset by a decline in cylinder sales for fire extinguishers and FCB.
Sales in transportation declined 19% in the third quarter.
Demand for luxury passenger auto improved modestly and auto auto catalyst products grew year over year.
However demand for aerospace applications weaken during the quarter as manufacturers implemented additional production cuts in response to a protracted slump in air travel.
Alternative fuel good don't do groups during the quarter.
We remain optimistic that this trend will continue going forward.
Sales in the general industrial end market declined 19%, which.
Which is a meaningful sequential improvement from the 27% decline in Q2.
The sales decline was broad based and impacted most of our industrial products.
However, we are encouraged by the sequential month over month improvement as the quarter progressed.
As expected there were virtually no solumag sales during the quarter.
Despite our strong position, we expect solid vaccines to remain challenged for the rest of the year.
Now please turn to slide six for an update on our transformation strategy.
We are successfully executing our transformation strategy.
Discipline.
And creating incremental value for our shareholders.
Successful completion of the simplification phase has significantly improved our balance sheet.
The lower fixed cost enables us to better navigate the covert pandemic and benefit from future recovery.
Phase two of the transformation plan covers improvement in a high performance culture and lean operations.
Phase three is focused on groups through organic means and to portfolio optimization.
We remain committed to completing the transformation plan I'm, creating incremental value as market recovers.
Over the next few minutes I would like to share some examples.
We drive successful phase two and three of the transformation plan stock.
Starting with a review of our environmental social and governance flight.
Kevin.
Despite the challenging economic landscape.
We have increased attention on developing sustainability initiatives.
That position us for stronger recovery and long term success.
We are pleased to report that we will be publishing our first ever environmental social and governance report in the coming weeks.
Our East Jeter Board discusses key subjects of interest to our shareholders.
Much of the establishment of our 2025 environmental protection goes.
Disclosures, all social statistics, and an overview of our governance structure.
Our upcoming used to report highlights our long term sustainability activities and explains how these activities are driving our performance.
The purpose of this report is to initiate consistent reporting on he is t. matters.
Improve transparency and disclosure and formulate the basis for an informed conversation between us and our stakeholders.
We realize that non financial reporting is important to our stakeholders.
As such we hope that by periodically publishing and he is beautiful.
We are creating a different platform through which we can connect about the ways, we are creating value for all our stakeholders, including employees customers communities the environment and shareholders.
We also hope that increase transparency in this regard.
And be a tool to promote our resilience.
And we will strengthen our ability to emerge stronger for schooling.
Now please turn to slide eight for an example of one of our growth initiatives.
As many of you know ours gonium products are often used in the formulation of three week catalyst.
For catalytic converters in gasoline powered automobiles.
Environmental consideration and changes in emissions regulations are increasing the content per vehicle of our products.
In addition.
Sure from diesel to gasoline in Europe.
Offsetting the shift from internal combustion engine to electric Waco.
For companies like us that are focused on gasoline be startups.
To further capture growth from this end market, we have recently launched a new nanotechnology based Florida.
Our gas party could exploration.
This new product utilizes our strong IP position.
And unique technology.
Deliver exceptional catalytic and filtration properties to our customers, while minimizing any exhaust back pressure to optimize performance.
We are optimistic that this new Florida, and our older existing products for gasoline articulate filtration.
Will drive strong organic growth.
We expect this product category to ultimately make up over one third of <unk> auto catalytic product sales.
Now please turn to slide nine for an example for success in the area of hydrogen fuel cell vehicles.
[music].
When it comes to hydrogen fuel cell vehicles for public buses and medium to heavy duty trucks not.
Luxfer is well positioned with 20 plus years of experience in hydrogen storage technology.
Our competitive advantage can hydrogen is based on industry, leading lightweight cylinder technology and our capability for advanced systems design manufacturing and testing.
We have a proven track record in partnering with customers to deliver hydrogen forced including the world's first hydrogen double Decker bus.
The first commercially available hydrogen garbage truck.
The first hydrogen based crane in the UK.
We manufacture the lightweight cylinders in our state of the art alternative fuel facilities in California and Canada.
Which also makes the lenders for compressed natural gas piece Waco.
Our systems are designed and assembled in our Nottingham UK facility using just in time development and manufacturing techniques.
Why is this is a nascent industry and sales of our hydrogen storage products make up only about 1% of our total sales.
We are excited about the growth potential in this space.
And we'll continue to invest in building, our hydrogen innovation and manufacturing capability.
Now please turn to slide 10.
An example of one of our lean manufacturing initiatives.
Our Luxfer Magtech Cincinnati facility.
Historically, only manufactured limbless ration heaters and self heating meals and beverages.
But more recently it has started the production of chemicals response kids after the consolidation of our factory in Riverhead New York.
The expanded size and scope of the Cincinnati factory had generated scale economies.
This has created the opportunity for us to deploy more lean talent and invest in manufacturing automation.
The recent successful launch of new chemical response kits for decontamination.
And the call we'd related higher demand for emergency response has placed additional strain on this facility.
To satisfy our significantly increased customers need power.
Our team had to recruit a large number of temporary employees.
Attracting training and retaining temporary employees during Kuwait has been a challenge.
So we have recently installed an automated packaging line.
Well, a self heating meals to reduce the need for additional workforce.
The new line will also increase the quality and consistency of our heater mute products why introducing the expected delivery times for our customers.
The Cincinnati example is just one of the many lean automation transformation.
That is taking place in luxfer facilities.
For the recent footprint consolidations.
Fewer larger factories are allowing us to deploy more lean resources and invest markedly to better serve our customers and increased productivity.
Our internal manufacturing scorecard shows significant improvement in safety quality delivery cost and cash in our factory.
These improvements will generate attractive returns and allow us to efficiently serve our customers.
Now, let me turn the call over to Heather Harding, not first Chief financial Officer for details on the transformation plan results and a summary of our third quarter financials.
Thanks, Hello, and good morning, everyone. Thanks for joining us today.
Oh in the Luxfer view of the strategic elements the promo of our multiyear transformation I wanted to summarize the financial impacts of this plan on slide 11.
Our focus on cost reductions and waste elimination has resulted in $18 million of net cost savings through the third quarter.
In addition to cost reduction the smaller footprint and our manufacturing has reduced our annual operating capital requirements by approximately $5 million to $6 million from our historical levels further improving our cash generation.
Our overall lower cost structure will deliver incremental profitability as our end markets recover.
We remain on track to deliver our committed $24 million of net cost reduction by the end of next year.
However, based on the strength of our Q3 performance, we now expect to deliver an additional $1 million in savings. This year for a total of $6 million to $7 million in savings in 2020.
Now, let's walk through the third quarter financial results summary on slide 12.
Third quarter reported sales of 90.4 million declined 15.6% year over year, primarily due to the cobot related impact and our transportation and industrial end markets.
Consolidated adjusted EBITDA for the quarter, a 14.2 million was down 15% versus the prior year.
Despite the volume decline the company executed on the transformation plan and delivered approximately $2.8 million net cost reductions in the quarter.
There were several onetime events in the quarter that impacted our results.
The quarterly adjusted EBITDA was positively impacted by approximately $600000 of net favorable nonrecurring items, including a net benefit from a customer contract in the gas cylinders segment.
Partially offsetting charges and the elektron segment for obsolete processes and agency contract.
The quarterly adjusted effective tax rate was negatively impacted by $900000 for the change in Canada tax rates affecting our deferred tax asset position.
For a deeper dive into our two product segments, let's turn to slide 13.
Electronic sales of 45.4 million declined 14.2% from the prior year.
The sales decline was primarily due to weakness in magnesium aerospace graphic arts and industrial products.
Actually all set by strengthen heater meals and chemical response kits.
EBITDA declined 36.5% to 6.6 million due to lower sales performance and then that 1.2 million dollar charge for one time nonrecurring items.
Gas cylinders segment sales declined 17% to $45 million, it's cold that impacted European luxury auto aerospace and industrial products with alternative fuel returning to growth.
EBITDA of 7.6 million increased 21% from the prior year as cost reductions offset the sales volume decline and profitability included a $1.8 million net benefit from onetime nonrecurring items.
Now, let's review, our key balance sheet and cash flow metrics on slide 14.
We ended the third quarter with a stronger balance sheet.
Our net debt improved to $59.3 million, leading to a net debt to EBITDA ratio of 1.1 times.
Third quarter operating working capital of 89 million was $17 million lower than Q2.
The resulting operating working capital as a percent of sales was 24.6%, which is slightly better than our prior year end level.
This performance reflects the results of our working capital initiatives, which were primarily focused on aligning inventory to current demand levels.
We expect to maintain most of these working capital improvements through the fourth quarter.
We generated $25.6 million in free cash flow a record for the third quarter using approximately 1.4 million in cash for restructuring activities.
This compares favorably to our prior year's third quarter performance of $1.2 million cash outflow.
On a trailing 12 month basis, we delivered 11.8% or a license from adjusted earnings are.
Our balance sheet is solid we're generating positive free cash flow, we remain well positioned for strong cash conversion in 2020 and beyond.
Now I would like to review our capital allocation priorities to slide 15.
As mentioned earlier on the call, we expect our cash conversion to average 100% of ours that didn't come through disciplined capital allocation.
We are in great financial position with a strong balance sheet and ample liquidity to take further steps to drive profitable growth.
This includes strategically evaluating our business portfolio and identifying or.
To drive additional shareholder.
Our primary focus of capital allocation will be creating value through internal execution.
It includes funding of new product innovation and talent development.
We continue to fund our transformational cost savings initiatives with expected cash cost of approximately $40 million through the end of this year.
We expect 2020 capex to be in the $8 million to $10 million range.
We remain open to strategic acquisitions to supplement our organic growth.
Our focus will be on businesses that provide one or more of the following criteria.
A leading position in the industrial material niches.
The ability to expand our business in key product categories market or geography.
Strong engineering IP are critical process technology.
Significant synergies and its strong cultural fit.
We would expect ROI seats meet our hurdle threshold within three years.
We will continue to return cash to shareholders via dividend.
As a reminder, we paid out over $90 million in dividends since 2013, including 3.4 million and the recent third quarter.
During our June annual General meeting, we received approval from our shareholders for share buybacks.
Although we're not initiating a program at this point given market uncertainty.
In the interest of transparency, let me provide our views on some of the key assumptions for the remainder of the year on slide 16.
The challenging current market environment is having a significant impact impact on our businesses.
For the fourth quarter, we expect total revenue to remain essentially flat on a sequential basis importing.
Importantly, this is despite our typical Q4 seasonality, where we often experience a sequential sales decline from the third quarter.
We expect both defense and transportation end market sales to improve slightly from Q3 levels.
Given the seasonal impact we expect industrial end market sales to decline sequentially consistent with prior year.
We remain focused on our cash initiatives for the year.
We will ensure working capital and capital expenditure plans are aligned to current conditions without sacrificing investment in future growth and productivity initiatives.
Building on our significant cash generation in Q3, we expect the cash generated in the fourth quarter to be used towards planned outflows as well as the modest inventory build driven by seasonality and potential Brexit impact for the year free cash flow would convert at more than 100%.
With our strong balance sheet.
Confident in our ability to successfully navigate current market conditions and position luxfer to capture growth as markets recover.
I'll turn the call back over to a look for wrap up.
Thank you Heather.
Please turn to slide 17.
Let me wrap up by recapping that reserve attractive niche markets with proprietary products and technology.
Our transformation plan has delivered results and we'll continue to make a positive impact for the next few years.
After the transformation plan is complete we have plenty of runway to create even more shareholder value by deploying the luxfer business excellence Donda tool kit to.
To drive operational improvement and to accelerate growth.
Once again I want to thank all our employees around the world or safely operating our facilities.
While maintaining our commitment to always putting our customer first.
Thank you for listening we will now take questions.
<unk>.
At this time, if you would like to ask a question. Please press Star then the number one on your telephone keypad again that is star then the number one on your telephone keypad to ask a question.
Your first question comes from the line of Chris Moore with CJS Securities.
Hey, good morning, guys. Thanks for taking the questions.
Wanted to make sure I'm looking at the.
Cost savings correctly, you talked about some corporate cost reductions to be permanent.
And then kind of trying to understand is that incremental to the transformation plan, that's happening now or or does that incorporate it in there or kind of.
And any detail you could.
Give us on the call the cost reductions that could be permanent would be helpful.
Sure So Chris I think from covert perspective.
We have quite a bit of cost reduction that we have to do just to offset the gross margin impact.
But putting that aside there kind of both cost decreases and higher cost each.
Each all factories is spending more for sonic dilution cleaning.
Inefficiencies and we have savings going to things like travel supply chain transportation.
The bulk of commitment on $24 million does not change so that remains our net cost savings.
What we are more optimistic as one's growth to cover us for next year and some of the onetime cost related costs are behind us we will generate additional edward dropped through on the growth and it covers.
But a simple way to look at it let's keep the cost talking somewhere at 24.
And.
You know any upside in future will come from better gross margin on sales that come back.
Gotcha alright, thank you.
[noise].
On the on the revenue side, how much visibility do you have into fiscal 21 with respect to the decontamination kits and the heater meals.
Yeah.
We'd have more visibility by the end of the year. So at this point.
We do expect a seems to continue going into next year at the same level as what we had in 2020.
By the end of the year, we'll have more confirmation in terms of confirmed orders, but right now we expect that to continue.
Got it.
And.
Obviously, new product development important does R&D spending need to increase much over the over the coming quarters in order to take advantage of the opportunities that you're seeing at this point.
Not really I think we could as you know we spent right about 1% anything numbers going to remain in that range.
We have been very efficient and we've been very focused on fewer bigger projects and that seems to be paying off without the need to significantly increase R&D spend I think we should think about that 1% for the near future.
Got it and last one for me any Brexit thoughts at this point in time is there any potential near term impact that that might it might be head on on Luxfer.
[noise], Hey, Chris I'll take that one good morning.
Well certainly we feel like we planned for this a couple times, depending on the nature of the project over the last I think four years or so.
Certainly from our perspective, we feel like we've done the proper planning that we don't think we'll be disadvantaged anymore than any other business, depending on what logistical or new you know administrative requirements are.
Our enacted we have as I mentioned, we are looking at some key inventory positions and making sure that in some key items that we will likely build a little bit up in the fourth quarter and frankly, we think some of our key customers. Maybe you know maybe looking at that as well. So overall, we don't view it as a significant material impact to us as.
As we get to the end of the year.
Got it I appreciate it I will jump back in line. Thanks.
Thanks, Chris. Thank you. Your next question comes from Craig Irwin with Roth Capital Partners.
Hi, good morning, and thanks for taking my questions.
So Craig.
One of the things one of the things I really like.
About Luxfer is you have an array of interesting.
Gross opportunities in front of you right everything from alternative fuels to new particulates technology, and automotive to Tom says to even things in medical markets right can.
Can you maybe.
Leased Youre your top operates.
Opportunities for expanding 2021 contribution to the top line can you maybe sort of you know expand on the proposed.
Proportionate impact store or maybe rank the rank the impacts from up from a dollar perspective.
And what you're looking for tend to get confidence there tend to be more more bullish today it seems like youre.
Generally conservative, which I know is it's just the way you operate but you know if you could maybe just describe what you're waiting for from your customers to get more confidence that these will all be a larger contribution.
Thanks, Craig.
From our perspective.
Because it's hard to talk about growth given the steep cold weather related impact putting macro aside.
The area that you're most bullish as alternative fuel right now.
And that's especially true with hydrogen, but also true for compressed natural gas.
That's a product line, that's more than tripled over the past few years.
And we already have a strong backlog of orders going into next year. So we feel quite confident we work with some great partners.
To begin to supply these solutions around the world.
So keep in mind also will be a very focused on large losses and heavy and medium duty truck. So we don't play in the passenger auto market.
Which means that we.
We are very specialized and capture our fair or more than our fair share of growth in that space.
Second I would put those recording a product line, that's where the gas party could infiltration belongs that's where we have quite a bit of the medical opportunities that go into pharmaceutical industry, and that's where close so we have some industry on new car to quoting based on some of our nano technology that we talk about.
So I think that's the other piece, we feel very confident about continuing to drive growth in that space.
The coat area that I would highlight becomes.
Something that Chris mentioned earlier is just decontamination decontamination kits Gilbert.
You have a child wants me to Cincinnati facility back we highlighted.
Another growth area for us.
On other areas, where we have unique proprietary technology and very high market share.
So those would be our one two and three alternative fuel zirconium products and finally, the decontamination Craig.
Thank you so if I could ask a follow up on on the alternative fuels side. So.
So you P.S. is one of the most vocal customers in this market.
Fortunately not not a big customer support for Luxfer right.
But they've gone out there and said multiple times on the record that they're class eight trucks. They operate them on alternative fuels, because even though they have higher maintenance costs. They still have.
Well superior economics to conventional diesel trucks right. The emissions regulations that are coming online and tightening and tightening for diesel are really pushing things in the direction of alternative fuels.
So the reason I reference yes.
Is are.
Are you seeing strength predominantly in the big rig market in class eight trucks or are you seeing broad strength across you know people looking for last mile delivery solutions on people people looking for for small fleet basically service organizations.
And everything in between or is there that same sort of concentration up towards towards the larger vehicles that they tend to go back to depots.
So what.
But thanks for bringing it up in home in EWP you on.
On itself may not be a big customer, but there are whole doors, which run similar local based delivery networks tend to think of companies such as waste management.
Our knowledge Amazon in all of these run based.
Based networks and public buses have a seminar systems those are clearly our target customers and reduce apply some to you yes, although competition probably have greater share in that specific customer base.
Our current who are more around route based kind of for the last mile delivery type opportunities, but we are seeing increasingly.
Thank you to more and more companies looking at large glossy a weakening as well, but the majority of our current sales are in a medium.
Thank you.
Josh this frame and looking at these which I'm more lot smarter delivery going back to the service networks.
We remain optimistic about the financing have you be treated ours as well, but that's more of a nascent industry right now.
Understood understood.
And then just as as a as a follow up here.
[noise] there had been a couple of very large contracts given in the last here I think one of them was you know a 500 million dollar contract on a systems level right.
And there's been chatter about about other shrank Amazon as a name that's out there.
Can you maybe describe for us the tempo of procurement activity in this market.
Do you see many many contracts that are out there and in the <unk> at a systems level I guess in the in the in the many hundreds of millions or a few hundred million but.
Come back to Ted to Luxfer.
So globally I think yes, we do see quite a few systems contracts and keep in mind that we assemble our older systems and UK.
So there we participate directly in the systems market and we see a very healthy pipeline.
Now.
Some folks are optimistic about those opportunities converting into dollars. So maybe less optimistic we for one not quite optimistic on that level.
It would come down to larger players like Amazon on the final decision that they make on that.
Fleet, so far CNG based way cause seem to meet all the environmental standards. They have excellent economics, given the desktop between CNG and diesel is down.
Pretty viable despite the changes in our enterprise.
And frankly from a environment perspective, given that a lot of electricity is generated two coal or natural gas anyway.
This has.
Very good environmental impact as well so yeah, we remain very optimistic on.
So why did we can't commit to a number of these 100 <unk> 500, I mean, it's in that range and some single opportunities some larger customers itself could.
Just be in that range on its own as well.
So that's an excellent opportunity we have tripled the sales here.
And we have prepared for sales continue going up and we'll keep investing in capacity and technology.
That's fantastic progress, that's really really good to hear.
So my next question is everybody understands why you're deemphasizing fire extinguishers since obviously the right move for the company.
But the impact on the top line and the duration of this impact is something where.
Yeah, it's been a little bit difficult to model.
Can you maybe describe for US what you expect the the revenue impact to be for you over the next handful of quarters, how long does it slashed and when does it start to show through in margins as being thats each products or shed.
Yes so.
First of all you are right when it is absolutely strategically the right thing for us to do this was a low margin on a medium cylinders hang on the wall.
There are like reading value proposition wasn't really valued by the customer.
Right now we look at this is about a little over a million dollars a quarter type impacts.
Greg.
And we expect this to start lapping at south by kind of an early 2021. So we have another couple of quarters off this million dollar quantifying the impact going forward.
Excellent. Thanks for taking my questions I'll take the rest of my questions offline.
That's on the progress.
Thanks, Craig.
Again, if you would like to ask a question. Please press Star then the number one on your telephone keypad that star one.
Hi, Sarkis.
Sarkis Sherbetchyan with B. Riley Securities.
Good morning, and thanks for taking my question or.
Okay, how are you.
Well thank you.
So just first wanted to get a better understanding on the gross margin level of the quarter. Other maybe if you could talk about what the one time inside elektron, if that had an impact there or there was just simply a mix impact and then I have a few more [noise].
Yeah. Good morning, Sarkis, so in terms of the one timers you know.
The bulk of the Onetimers from a cost perspective did hit gross profit so over a million dollars of that growth of that onetime cost and that cost did hit gross profit. So the and that obviously impacted electrons. So if you add them on a restated basis Elektron EBITDA would have been.
You know north of like 17%, excluding the items. So that's certainly a big yet when you think about the gross margin I know our reported gross margin is just over 20%. When you when you pull out the impact of the one timers, we were closer to 21, seven which you know certainly we're still obviously impacts.
Acted by the cobot sales decline, but if you look sequentially relative to Q2, we posted some nice margin improvement on the gross margin line just purely looking at an operating basis. So hopefully that gives you some indication of kind of the impact of our cost reduction programs and how we're working through all the.
Ah efficiency items in our plants.
Yeah. So thanks for that and I think you mentioned in the prepared remarks, you'd expect sales to kind of remain flattish here sequentially.
Maybe if you can talk about.
What you're seeing regarding order rates and maybe by you know either end markets and then you know if you can maybe comment on.
The margin structure Youd anticipate should that be kind of in line with what we saw this quarter and or improving given kind of your cost out just help us understand that.
Sure So I'll start with the order rates.
It's still quite uncertain I know visibility remains.
Less than ideal amount less than before.
If I think of defense, a broad bucket I mean order rates are strong there.
And there's typically an election, youre pause, which we anticipated on our freezing putting that aside.
Order rates remained strong and we are bullish about.
You know getting that to be slightly growing volatile like in Q4 and going forward that's had I mentioned.
Transportation, you know aerospace's recur automotive is a little better alternative he was going to grow as we talked about so net net I think that's going to become a bigger growth.
Yeah for us going forward as well.
Industrial is the one where its most challenging.
For two reasons you know Q4 is sequentially lower for industrial so we are going to feed stock.
And that's where.
I think we have seen.
More just bouncing along the bottom, it's not getting worse, but we haven't seen things getting a lot better.
So that's the one which we are focusing on so it can be looking at.
Good how do we.
Take this forward.
From a margin structure perspective, while in general no margins are pretty comparable across the board.
In industrial is very healthy margin.
[music].
Auto that's coming back is lower margin than aerospace Sungard does have a negative mix impact was.
Kinda, partially offset by defense being stronger.
So net net it would put the picture together I would expect margins to remain stable going forward, excluding the onetime impact that hadnt already mentioned.
Some of the clean up things that occurred in Q3.
Has anything to add to that or so because of that answer your question.
Yes, the only thing I might add a look at the last part I think his question was around cost reduction. So certainly you know in our deck. We talked about we've increased this year's cost reductions from six to six to seven but we're pulling we're pulling some forward. So obviously given the fact that we posted I think it's four.
And a half million year to date, you could certainly you know model in continued cost reductions that we do expect to deliver in the fourth quarter.
That's super helpful and I guess, just to kind of build off without a thought process. Other is.
The estrogen a run rate of this quarter I'm kind of the appropriate to look at going forward given kind of the cost out or were there anything unusual to consider for that number not to be kind of the typical number going forward.
Yeah, I think from a from that perspective, I think the SG in a pretty indicative you know there's always a bit a quarterly thing that happened, but overall I would say, it's pretty indicative for you to use going forward.
Okay. Thank you I'll take the rest offline.
Thanks, I guess.
Thank you again, if he would like to ask a question. Please press Star then the number one on your telephone keypad. Your next question is from Michael was shocked with Keybanc.
Hey, guys. Good morning wondering Michael.
Oh, So first just on the FCB a timing you you called that out as it was impacting sales in the quarter.
I thought a majority of that was behind us at least three co bid. If you could kind of talk about what what happened there and when you expect to realize the sales [noise].
Sure. So I think on SCB at the pre covert disruptions for more it on some sort of education and that's clearly behind us I.
I think right now what we are facing in SCB here as we work very closely with key customers, which you know they are.
And each of US are just having a bit of a supply chain challenge and retooling our factories for covance, ensuring social distancing.
So we have had some timing related issues in that case.
And just unfortunate case off everybody operating under the new normal recall that but these are factories, where people are often standing shoulder to shoulder doing assemblies and kids and.
Everybody I can just read through all the operations. So they're more just operational supply chain related delays that we hope to be able to catch up in Q.
Q4, and Q1 going forward to overtime, we can work and things like that but just not a demand issue at all.
Got it that's helpful.
Then moving on the M&A front.
Just out of curiosity would you be targeting multiple niche transactions, there and would you favor a larger deal.
You know I mean, I think weve talked about bolt ons or what we are going to focused on.
From our perspective.
Not against doing larger transactions given past experience on where we think we can act and nipigon value, it's going to be around.
Nishan markets.
Yes ma'am.
The strong market position similar to what we have good attractive margins.
But no we're not looking at a big large type transaction or focus is going to mean onboard on things, where we can get significant synergies.
And fits with Okay came off the color riches are ambitious so would continue pushing goes but at the same time.
Valuations that leasing transactions have not come down and there's still a lot of money from private equity so.
Not suggesting that anything is going to be eminent here.
Is there an end market that you might target more than another.
You know our strength on a defense, obviously something that we like quite a bit so the whole forced category I mean, we like aerospace.
There are niches within industrial that we like so no not specifically, but we try to.
Not increased complexity of Luxfer.
Alternative fuel is an area that we like quite a bit so it's just going to be here yes.
We feel we are strong in.
And areas where.
One plus one is greater than two.
Got it appreciate all the detail. Thank you.
Thanks, Michael.
Thank you. Your next question comes from Phil Gibbs with Keybanc capital markets.
Yes. Thank you.
A low when you talk about the the gasoline particulate filtration opportunity I think your pitch says two.
Two and a half time sales increasing 2011, excuse me 2021 versus 2019, how much how much of that growth did you get in 2020.
Just presumably you're you've been growing this year on that as well so I'm trying to gauge.
Yeah. So we are growing now keep in mind that two and a half times is starting from a low base. So not all our sales are going into gas part a good accreditation.
I mean document will be about 30% of our Arctic cat's sales going into gas party credit for duration.
This year I would say, the which is kind of consistent with our previous roles you only talk about new products when viewed each about a million dollar in sands. So that's where we would be this year.
You're going to be about a million dollars in sales and.
This this uh huh.
Yes.
Okay. Okay.
And so that we should we consider that that level you were up 2019 as well. So this is going from about.
A million to.
279 D. Most close to zero. So there is 2000 $20 million all new sales fell.
Okay got.
Got it ought to be overall auto kind of a general thinking.
I can always on.
One follow up on an Organiser corneum sales.
[laughter]. Another you talk you talked a little bit about the cost savings.
Clearly this quarter was very strong in that regard you expect incremental cost savings relative to the Threeq you.
Baseline or is the number that you increased your mostly based on your your comparisons so fine.
I know just understand if there's incremental relative to this past September quarter.
Right. So certainly as you know when we measured the cost reduction that is based on year over year. So we would expect a continuation of those programs into Q4 Weve taken some significant cost actions here in the last two quarters and so we're always looking for additional opportunities, but I don't expect you know material significant.
Sequential.
Cost reductions from from three to four you know, it's a continuation of our current pump plan of our cost reduction plan.
Thank you.
Thanks, Phil.
Thank you and encore recording of this conference call will be available in about two hours telephone numbers to access the recording will be available at Luxfer is what the site at Www Dot Luxfer Dot com. Thank you for joining US today. The next regularly scheduled call will be February.
2021.
When the company discusses it's 2020 fourth quarter financial results.
This ends the Luxfer conference call you may now disconnect.
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