Good morning, my name is Dorothy, and I will be your conference operator today. Welcome to Luxfer's 2019 Third Quarter Earnings Conference Call. All lines have been placed on mute. After the speaker's 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.

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.

Thank you, Cassandra. Welcome everyone. During our call today I will provide an overview of our third quarter performance, an update on transformation planned progress, and an outlook for the remainder of the year. Please turn to Slide 3 for a summary of our performance. Third quarter 2019 financial results were a reflection of weak industrial macro conditions in the U.S. 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% to $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 fourth 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 capital 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…

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 Superformed. 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 at $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 plans 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 products. 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…

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 U.S. 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 NYSE 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 U.S. 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.…

[Operator Instructions]. Your first question comes from the line of Chris Moore with CJS Securities.

Hey, good morning guys.

Good morning Chris.

Good morning Chris.

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 2020 for SoluMag?

Chris, the addressable market remains pretty high. And as you know, we have a small penetration and small share in that. In the past years, we have estimated the addressable market to be about $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...

Yeah Alok, 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?

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 brackish 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 remained 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.

Got it. In terms of 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?

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 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 MIT 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.

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 2019 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 2020, 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?

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.

Understood, I appreciate it guys. I'll jump back in line.

Your next question comes from the line of Michael Leshock with KeyBanc Capital.

Hey, Alok and Heather, good morning.

Good morning, Michael.

Good morning.

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?

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 two to three 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.

Okay, and then just looking at the impact from the recent GM strike on your auto business. Could you talk about 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?

Yeah, so from GM strike we have had minimal impact. That's not a huge area, 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 since 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. So, 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.

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?

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 of one of our customers Wrightbus that I think Heather mentioned in her portion of the conference call.

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?

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 all 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.

Alright, thanks.

[Operator Instructions]. Your next question comes from the line of Sarkis Sherbetchyan with B. Riley FBR.

Thanks for taking my question. Good morning, Heather and Alok.

Hi, Sarkis.

Good morning.

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?

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.

Understood and so, in regards to kind of product mix nothing else really changed the margin profile is that correct?

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 would have had a little bit of an impact. But nothing else really changed from a product mix perspective.

Okay, understood it. And I think if I kind look at just the SG&A 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?

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 levers that we can to deliver enhanced profitability.

And if I could add on to that, Sarkis, one of the things to keep in mind is that the SG&A 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.

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?

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, that's -- you can think of it as like, four or five year investment cycle to go from roughly 1% to roughly 2%.

Got it, yeah, so certainly it 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.

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.

Thank you for joining us today, and for your continued interest in Luxfer.

Thank you ladies and gentlemen. That does conclude today's conference call. We thank you for your participation and ask that you please disconnect your lines.