Luxfer Holdings PLC Q4 FY2020 Earnings Call

Good morning. My name is Lorie, and I will be your conference operator today. Welcome to Luxfer’s 2020 Fourth Quarter and Full Year 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 Heather from Luxfer. Heather, please go ahead.

Thank you, Lorie. Welcome to Luxfer’s fourth quarter and full year 2020 earnings call. We are happy to have you with us today. I am Heather Harding, Luxfer’s Chief Financial Officer; and with me today is Alok Maskara, Luxfer’s Chief Executive Officer. On today’s call, we will provide details on our fourth quarter and full year 2020 performance as outlined in the press release 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. Now 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 the Safe Harbor statement on Slide 2 of today’s presentation for further details. Now, let me turn the call over to Alok.

Thanks, Heather, and welcome, everyone. Thank you all for joining us today. To start with, I want to thank our employees for their continued focus on serving their customers while managing the inherent challenges of the pandemic. I am grateful to all of them for delivering strong cash and margin performance throughout the year, while maintaining steadfast adherence to safety protocols as we continue to navigate the COVID pandemic. I want to highlight that as part of our transformation plan, we intend to divest the majority of our aluminium operations, including Superform. We are in active dialogue with potential acquirers for these valuable assets and plan to complete the transaction over the next 12 months. The divestment of these businesses would lead to about 200 of our employees moving to a new employer. And I want to personally thank each and every one of them for the years of service to Luxfer. I appreciate the patience and dedication of these employees as we work through this process while continuing to focus on our customers first. Given our intention to divest these operations, all the numbers in our press release and presentation exclude the results of these operations as per the accounting guidelines for discontinued operations. Before I review our results, I want to highlight three key messages. First, we delivered solid Q4 earnings. While some of our end markets remain challenging, we experienced sequential improvement in sales, despite typical Q4 seasonality, and we realized growth in several new products. Second, we generated strong cash flow further bolstering our already robust balance sheet. This gives us greater opportunity as we invest in organic growth enablers and pursue potential inorganic opportunities. Third, we executed our transformation plan with cost savings exceeding expectations, while making meaningful progress on initiatives to drive growth through portfolio changes, new product development, and commercial excellence. I will provide more details on these themes and our CFO, Heather Harding, will then review our financial performance in greater depth. Now please turn to Slide 3 for a summary of our fourth-quarter financial results. During the fourth quarter, total sales of $82.1 million were fairly flat year-over-year, and we saw a sequential improvement of 5.7% from Q3. Fourth-quarter adjusted EBITDA of $13.8 million increased 21%, primarily driven by cost actions. Our adjusted diluted EPS for the fourth quarter was $0.27, an increase of 35% from the prior year. Full-year core sales declined 11.3% to $324.8 million as our sales were negatively impacted by the pandemic. Our full-year adjusted EBITDA of $53.9 million declined 19.7%, and the resulting adjusted EPS was $1.3, down 30%. Our cash flow in 2020 increased significantly as we generated $41.3 million of free cash flow, reversing the 2019 outflow of $8.1 million. The cash flow improvement was driven by lean working capital improvement and significantly lower restructuring cash outlay. Strong cash flow enabled us to reduce our net debt to $51.9 million compared to net debt of $81.2 million at the end of 2019, while we also returned $13.6 million back to shareholders as dividends. Our net debt-to-EBITDA ratio improved to one-time at the end of the year. Our balance sheet remains strong, providing financial and strategic flexibility. Now please turn to Slide 4 for an overview of how we are strategically reshaping our product portfolio. After a thoughtful review of our portfolio of businesses and the future trajectory of Luxfer, we have concluded that it is in the best interest of our shareholders, employees, and customers to divest most of our aluminium assets. This will enable us to focus our strategic efforts and capital to grow the company. The remaining portfolio has strong margins and growth profile with a narrow focus on high-performance Magnesium Alloys, Zirconium Catalysts, and high-pressure composite Gas Cylinders. This divestment will impact three of our gas cylinder operations, including our Superform location in the UK, our aluminium cylinder operation in Graham, North Carolina, and our Superform location in the U.S. We are in active discussions with potential buyers for these valuable operations and plan to close the transaction in 2021. The remaining gas cylinder sites are involved in the manufacturing of innovative cylinders, composite cylinders, and systems, all of which are integral parts of Luxfer’s future growth profile. Financially, the discontinued operations reduce Luxfer revenue by 14%, but have negligible impact on our profits for 2020. Our profit margin and our return on invested capital both increased by 200 basis points. The revised Gas Cylinder segment represents 44% of total Luxfer sales and 40% of total Luxfer profits at the end of the year 2020. Within the Gas Cylinder segment, one-third of our sales were from CNG and Hydrogen storage products, which represent a significant growth opportunity for us. As a result of these changes, there will be increased management focus on driving organic growth and acquisitions to accelerate shareholder value creation. Please turn to Slide 5 for an update on our transformation plan. We are successfully executing our transformation strategy with discipline and are creating incremental value for our shareholders. The simplification phase has expanded our investor base by streamlining our financial reporting and governance while strengthening our balance sheet. Our operations have also been substantially simplified, and post-divestment of the aluminium operations, Luxfer will have 10 core operating sites compared to over 20 operating sites three years ago. As part of the transformation plan, we have established a higher performance culture with a focus on continuous improvement. Our productivity projects are on track to deliver $24 million in cost savings by the end of the year, in addition to reducing our historical annual capital spend by $6 million. The high-performance culture and lower fixed costs helped us navigate the COVID pandemic and position us well to benefit from future recovery. Now, the focus of our transformation plan is to drive growth both organically and through value-creating acquisitions. We have laid the groundwork for successful organic growth by rebuilding our new products pipeline and establishing commercial excellence. In addition, our Luxfer business excellence standard toolkit and healthy balance sheet enable us to generate value through bolt-on acquisitions. Please turn to Slide 6 to review progress on our new product development process, a core component of Luxfer’s business excellence standard toolkit. Our disciplined, totally based new product introduction process relies on lean continuous improvement and a customer-first approach. While progress was slower in 2020 due to COVID, our efforts are gaining traction as evidenced by an 8 point increase in our revenue from new products from 9% to 17% over the past three years. We expect this number to continue improving, and we are targeting new products introduced in the past five years to account for over 20% of our revenue by 2022. Examples of our new products contributing to growth this year include our nanotechnology-based zirconium solution for gas particulate filters, our innovative self-heating unitized group rations, and our recently introduced non-limited life cylinders for European medical applications. To accelerate new product introduction momentum, we are increasing talent investment with plans to further strengthen the technology team and leadership at all our business units. Some of our recent growth investments have been in the area of alternative fuel CNG and Hydrogen, which is discussed in greater detail on Slide 7. Most divestment of the aluminium operation, 33% of Gas Cylinder segment, and 15% of total Luxfer sales will come from alternative fuel cylinders used for CNG and Hydrogen storage. Our sales of alternative fuel cylinders have been growing at an annual CAGR of about 20% for the past three years due to share gain and industry growth. The industry growth projections for the near term remain robust, driven by wider adoption of Hydrogen and CNG, and we are confident in our strong competitive value proposition. Our focus remains on heavier vehicles such as city buses and commercial truck fleets. This target segment’s conversion from traditional diesel to low and zero-emission vehicles is driving rapid growth. Luxfer has a long-established position in this industry and currently serves this end-market from our state-of-the-art facilities in California, Canada, the UK, and China. We will continue investing to expand our capability and capacity for these lightweight high-performance type 3 and type 4 gas cylinders. Our new product pipeline includes type 4 Hydrogen storage products to meet demand for this rapidly growing end-user market. While the drive towards a clean environment and emissions is fueling the growth of alternative fuel, it is not the only global mega trend that is enabling growth for Luxfer products and solutions. Please turn to Slide 8 for an overview of other global mega trends that are shaping Luxfer’s future growth. The key mega trends shaping Luxfer’s future growth are light weighting, safe and healthy lifestyle, and clean environment and emissions. Luxfer’s historic growth has been driven by the trend towards light weighting, and we believe that this trend will continue for many more years. Our magnesium alloys play a critical role in reducing the weight of key high-temperature, high-performance, aerospace, and industrial components. We are also the world leaders in lightweight high-pressure composite cylinders for SCBA and other similar applications. The lighter nature of our products enables firefighters and first responders to be ergonomically safe while carrying sufficient oxygen for their difficult tasks. A safe and healthy lifestyle is also shaping our growth profile as demand grows for healthier meals ready to eat using our flameless attraction heater technology. Additionally, our zirconium products are used in pharmaceuticals and water treatment applications, and our portable medical oxygen cylinders also benefit from the global trend towards safe and healthy lifestyles. In addition to shaping the growth of our alternative fuel products, the mega trend towards clean environment and emissions is also accelerating the growth of our auto catalyst product line. Part of our auto catalyst product line is our newly introduced gas particulate filtration product, which is being adopted in multiple platforms to meet the increasingly stringent environmental regulations. As a result, we believe that our auto catalyst content per vehicle will continue increasing for the foreseeable future. Now, let me turn the call over to Heather Harding, Luxfer’s Chief Financial Officer, for details on our fourth quarter and full year financials.

Thanks, Alok, and good morning, everyone. Again, thank you all for joining us. First, I’d like to review our sales performance by end market on Slide 9. As a reminder, our sales can be classified into three key end-user markets: Defense, First Response, and Healthcare; Transportation, which is a combination of Alternative Fuel, Aerospace, and Automotive; and General Industrial. In the Defense, First Response, and Healthcare end market, quarterly sales declined by 3%. We saw increased demand for our disaster relief products, but that was offset by a decline in our products for first responders, including firefighters and medical personnel. Sales in transportation grew 20% in the fourth quarter, driven by strong demand for hydrogen and compressed natural gas products. We also experienced growth in our auto catalyst products driven by an industry recovery in the lighter adaptation of gas particulate filtration. Weakness in aerospace was offset by growth in other product lines. Sales in the General Industrial end market declined 11%, which is a meaningful sequential improvement from the 21% decline in Q3. The sales decline was broad-based and impacted most of our industrial products. However, we were encouraged by the sequential improvement in sales and order rates. Now please turn to Slide 10 for a summary of our fourth-quarter P&L results. As a reminder, all the information presented today excludes the results of discontinued operations. We have provided details of the statement activity in the appendix of this presentation and in our 8-K filings. Fourth-quarter sales of $82.1 million were fairly flat compared to the prior year, with favorable FX and price offsetting volume decline. Growth in transportation fueled by alternative fuel sales was offset by the COVID impact on industrial products. Consolidated adjusted EBITDA for the quarter of $13.8 million improved 21.1% versus the prior year. Despite the volume decline, the company executed on the transformation plan and delivered approximately $3 million of net cost reductions in the quarter. Overall, we made great progress on cost savings in 2020, finishing this challenging year with solid results. Let’s look at our product segment results on Slide 11. Elektron sales of $47.2 million increased 1.3% from the prior year. The sales growth was primarily due to stronger sales of Defense, meals ready-to-eat, coupled with growth in auto catalyst products. Gas Cylinders segment sales declined 2.2% to $34.9 million, which was negatively impacted by COVID in industrial products, while alternative fuels posted double-digit growth. Despite the sales decline, EBITDA of $4.7 million increased 14.6% from the prior year as cost reductions offset the lower sales volume. Now let’s turn to Slide 12 for an update on the financial impacts of the transformation plan Alok discussed earlier. Focused on cost reductions and waste elimination, has resulted in $21.5 million of net cost savings through the end of 2020, which represents the third full year of our transformation plan. In addition to cost reductions, the smaller manufacturing footprint has reduced our annual operating capital requirements by approximately $6 million from historical levels, further improving our cash generation. We are confident we will deliver the remaining $2.5 million in savings from our committed $24 million of net cost reductions in 2021. We then expect to continue our ongoing remanufacturing focus, including automation projects, with a goal of delivering around 2% annual cost productivity. Now let’s look at our key balance sheet and cash flow metrics on Slide 13. We ended the fourth quarter with a stronger balance sheet. Our net debt improved to $51.9 million, leading to a net debt to EBITDA ratio of 1 time. We improved fourth-quarter operating working capital to $71.8 million with the resulting operating working capital as a percent of sales of 21.9%, which was better than our prior year-end level of 23.2%. Going forward, we’ve targeted an operating working capital as a percent of sales range of 20% to 22%. We generated $41.3 million in free cash flow for the year, using approximately $4 million in cash for restructuring activities related to our transformation plan. On a trailing 12-month basis, we delivered a 15.2% ROIC from adjusted earnings. Our balance sheet is solid. We’re generating significant free cash flow and we remain well-positioned for strong cash conversion going forward. Let’s take a look at our longer-term performance metrics on Slide 14. Before 2020, our top line growth averaged 3% from 2016 to 2019. Due to the COVID impact in 2020, our revenue performance over the past four years is flat. However, our cost reduction efforts are a primary driver of the 4% annual EBITDA growth over the same time period. Results in EPS have grown over 10% per year with an average EBITDA margin over 17%. These results show the favorable impact our transformation plan has delivered and as markets recover and we return to growth in 2021, we’re well positioned to create additional value for our shareholders. Now I’d like to review our capital allocation priorities on Slide 15. We generate strong cash and expect to achieve 100% conversion to net income. We’re in a 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 inorganic options to drive additional shareholder value. Our first capital allocation priority will be creating value through internal execution, which includes funding new product innovation and talent development. We have funded our transformational cost-saving initiatives with a cash outlay of approximately $37 million through the end of 2020, and we expect to spend the remaining $11 million of cash in 2021. We expect to return to a normal capital spending range of $10 million to $12 million in 2021, which is higher than our $8 million 2020 spend, but lower than our historical $18 million average. Next, we remain open to strategic acquisitions to supplement our organic growth. Our focus will be on businesses that meet our established strategic filters and financial criteria. Lastly, we’ll continue to return cash to shareholders via dividend. As a reminder, we’ve paid out over $93 million in dividends since 2013, including $3.4 million in the fourth quarter. We’re maintaining our current dividend program and we’re pleased to announce that our board has authorized a $25 million share repurchase plan. As noted in our press release, we are providing guidance for 2021 and you can see our key assumptions on Slide 16. For 2021, we expect full-year revenue growth of 3% to 9%, which includes approximately 3% to 4% of favorable currency impact as the British pound continues to strengthen against the dollar. We expect Defense, First Response, and Healthcare products to grow in the mid-single digits with strong MRE and military sales. Transportation products are expected to grow in the low double digits, driven by alternative fuel, including hydrogen and new products, such as gas particulate filtration. We expect industrial products to grow in the mid-single digits. This delivers EPS in a range of $1.05 to $1.25. Looking at the timing within the year, we expect the first quarter to be sequentially flat to Q4 of 2020, given the current currency profile and some disruption from Brexit. We will continue our execution on cash initiatives targeting a 100% free cash flow conversion for the full year, excluding restructuring. Given our typical seasonality, our Q1 free cash flow is weaker than other quarters. With our strong balance sheet, we remain confident in our ability to successfully navigate through this recovery year and be well positioned to capture growth. Now I’ll turn the call back over to Alok for a wrap-up.

Thank you, Heather. Before I wrap up, I wanted to update you on our ESG efforts, as we published our first ESG report after our last earnings call in November 2020. This report highlighted key stakeholder interests, including our environmental goals, social statistics, and governance structure. We realize that non-financial reporting is important to our stakeholders, and we are committed to providing transparency around our sustainability activities. As a result of our recent efforts, our ESG scores from ISS have improved significantly over the past few months. Our environmental score has improved from nine to four, our social score has improved from six to one, while our governance score remained at a strong two. Please turn to Slide 19 for a wrap-up. Let me wrap up by recapping that we serve attractive niche markets with proprietary products and technology. Our transformation plan has delivered results and will 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 standard toolkit to drive operational improvement and accelerate growth. Once again, I want to thank all our employees around the world for safely operating our facilities, while maintaining our commitment to always putting our customers first. Thank you for listening. We will now take questions.

Thank you. Our first question comes from Chris Moore of CJS Securities.

Hey, good morning guys.

Good morning, Chris.

Good morning. Yes, maybe just start with alternative fuel, obviously, a very exciting area. Just trying to get a feel for how competitive this market is. Worthington, it sounds like just announced a product that they’re going to do in the hydrogen space. Are there a couple of people that you see regularly or just kind of your thoughts on that competitiveness?

Sure. So I think from our perspective, we are very focused on heavy vehicles and there is a lot of competition in the lighter vehicles and the smaller cylinder space. But in the heavy vehicle segment, our position is pretty strong. I don’t want to discuss our competitors in detail, but I would say Hexagon and Worthington are great companies that offer similar products in certain markets of ours. Our differentiating value proposition is that we have been in this industry for a long time and have made both Type 3 and Type 4 products; our reliability and our long-term reputation is a huge asset for companies choosing where to buy their products from. Also, our narrow focus on heavy trucks and buses is very beneficial to us compared to our competition. So, while we do see competition and expect more, it is a very exciting industry, and we really like our position here.

Got it. Helpful. And commodity prices have been very volatile recently; your key inputs have, I guess, aluminum, magnesium, zircon sand, and some rare earth minerals. Any concerns there, and how does your supply chain overall look?

We like lower commodity prices versus higher. So from that perspective, yes, there’s some monitoring that we do constantly, but overall, our standard operating mechanism is that we are able to pass on higher commodity pricing within a sort of 60 to 90-day delay timeframe. Although the aluminum price has recovered from the pandemic, we think they’re still manageable. Zirconium has a well-established supply chain, and on magnesium, we typically use back-to-back locking based on our contracts with governments and others. So yes, I mean, we monitor it constantly, but we maintain our view that over three to six months timeframe, our inflation versus pricing would continue to offset each other. So we’ll keep watching, but no immediate concerns here.

Got it. Last one for me. Is there any SoluMag in your fiscal 2021 guidance?

We put a small amount, which is kind of similar to what we had in 2020. We’re not making any growth in SoluMag for 2021.

Got it. I appreciate it. I’ll jump back in line.

Thanks, Chris.

Your next question comes from the line of Craig Irwin of ROTH Capital Partners.

Good morning, and thanks for taking my questions. Hey, Alok and Heather. I wanted to start with transportation; the 19.5% growth in the fourth quarter of 2020 is a strong number. You do mention that oil fuel was double-digit growth. But maybe can you help us understand a little bit about what drove that strength there. Was there maybe a channel fill from the particulates product for automotive catalysis that you’re launching this year? Was there something else maybe that outperformed in there that gave you such a strong result?

We think it’s sustainable and not driven by any specific factor, so there was no inventory fill or anything else that we can point to. But do keep in mind that Q4 2019, we did have some disruption related to one of our customers in alternative fuel, but the largest driver of growth was alternative fuel.

Okay, excellent. So over the course of 2021, I think you guided for mid-single digit growth in the segment. Can you maybe help us understand the contribution that you’re expecting from the new particulate product? Is this likely to be a material contribution? Will we see sort of more than a $10 million or $20 million uplift to catalysis revenue? How much proportionately is the content per vehicle increasing? Are we seeing a potential double, 15%, 25% at any color you can offer?

Sure. The largest driver of growth for 2021, Craig, will remain alternative fuel. That’s the key factor giving us confidence to guide for low double-digit range for transportation in 2021. The content per vehicle for gas particulate filtration and auto catalyst is increasing in the range of 20% to 25%. It’s not doubling, but we do expect that to add positively in 2021, especially given that 2020 was a challenging year for automotive. If I take a step back, both auto catalyst gas particulate filtration, our new Type 4 hydrogen cylinders, and continued traction on our G-Stor products for CNG and hydrogen will all contribute meaningfully, but alternative fuel and hydrogen will be the main driver.

Excellent. I wanted to ask a question about some of the content on your Slide number 7, right, future capabilities. You’re pointing to new opportunities in Asia. You’ve done a tremendous job getting down to 10 facilities from 20 over the last couple of years, restoring the growth profile and the profitability of the company. Can you maybe talk about where you are in the decision process on potentially building something in Asia? And is this going to be strictly CNG and hydrogen as you suggest in the slide? Or are there maybe other opportunities, and is there any CapEx related to this in your guidance for this year?

Yes. Great question, Craig. So we’ve been in China for a while, but we recently started composite cylinder manufacturing in China. And that’s what we highlighted on Slide 7. Right now, our focus remains on all our composite cylinder end market, including SCBA, aviation, and alternative fuel. We are just starting on that journey, maintaining our focus on heavy vehicles as we have done in the past. There is a CapEx requirement, a large portion of our CapEx guidance will go towards alternative fuel, just like it did in 2020. But it’s all included in our current numbers; nothing incremental beyond that, as we have capacity globally that we can move around and the capability to deploy globally as needed.

Understood. Congratulations on the strong result. I’ll hop back in the queue.

Thanks, Craig.

Your next question comes from the line of Sarkis Sherbetchyan of B. Riley Securities.

Hi, good morning, Alok and Heather. Thanks for taking my question here.

Good morning, Sarkis.

Yes. So just want to quickly touch on the divestment of the aluminum product lines, including Superform. I think if I look at the discontinued sale offline, a little over $50 million for this year and very small kind of EBITDA contribution. I guess, as we strip out this business line from the financials and we look at the business going forward. Can you maybe help us understand what the incremental contribution margin will be pro forma as if you were to have divested that business and as we think about sales growth and operating leverage on your infrastructure?

Hey, good morning. Sarkis, it’s Heather. I’ll take that one. So when you look at our mix, certainly as Alok mentioned, the new Gas Cylinders segment represented about 44% of our sales for the total company. Going forward, obviously, the Elektron margins will drop through around that 30% level. And we would expect Gas Cylinders sale to drop through approximately around 25% going forward. There would have been some profitability included in 2021 when we built our original budget, so we’d expect that’s probably in the $2 million range that will not occur in our continuing operations.

Great. Thanks for that, Heather. I guess a point about also is how does the free cash flow profile change excluding the discontinued ops and looking at the business going forward? Does that improve? Does that stay similar? Just kind of help us understand that.

Yes. When I think about free cash flow, certainly you can see in our statement. There was minimal impact from discontinued ops in terms of free cash flow. So moving forward, our guidance remains the same. We still expect to convert 100% of net income excluding restructuring. It really doesn’t change that profile much going forward.

Got it. And I think look, you mentioned building the business organically and through some value-creating acquisitions. Maybe if you can help us understand the areas you’re looking at; are there certain end markets that you believe you need to go out and buy versus build on your own? And if you can maybe comment on potential geographies that you think you might need to fill holes and just any color there would be extremely helpful.

Sure. There’s a broad range of opportunities we are targeting regarding acquisitions. I think the strategic filters, as laid out by Heather, are all the right ones. To answer your question more directly, Sarkis, I mean obviously we are looking to improve our growth profile. So we would look for acquisitions in areas like alternative fuel, where if we believe we can get additional capabilities and capacity at the appropriate valuation, that would be something we consider. Clearly, Asia and emerging markets remain geographical expansion opportunities for us given how little of our sales currently go in that region. So we look at that as a greenfield versus brownfield or an acquisition. Additionally, things like aerospace and defense, while it’s in a tough spot right now, we are in the business for the long term and remain confident that if there is a fitting opportunity at the appropriate valuation, considering market sentiments and suitable synergies that come to us, we wouldn’t shy away. We've been trying to focus on things where we can create operating synergies, things that improve our growth profile, including growth driven by mega trends, geographical expansion; there’s a broad basket of opportunities. We’re pleased with how quickly the M&A market has rebounded compared to last year.

Got it. That’s super helpful. And I think just to piggyback on the point you made regarding aerospace and defense, it seems like that’s an area of opportunity given the specialty materials that the industry consumes. Would you say that there’s a particular product set that could be attractive or add to your capabilities that you don’t currently have? I mean, is that more of a material, a particular type of materials specialty that you’re looking to buy or bolster?

Yes. I mean we obviously have a very strong position in something like magnesium, which is a niche material with a small market size, but a very strong position. If we looked at similar opportunities, whether it’s getting into composites or other specialty metal alloys, that would be our focus. While I wouldn’t go into specifics yet, we’d be looking at niche materials, alloys, composites that allow us to leverage our existing position in aerospace.

Fantastic. Thank you. I’ll hop back in the queue.

Thanks, Sarkis.

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

Hey, Alok and Heather, good morning.

Hey, good morning.

Good morning.

First, I wanted to get your expectations on defense going forward, and what changes you’ve seen from the new administration. I know it’s early on, and generally a lumpy business as well, but wanted to get any color on what you’ve seen there thus far and maybe expectations going forward.

Yes, Michael. I’ll start on that one. Typically for us, ignore anyone’s personal politics; we’re certainly glad the election is behind us. It creates obviously more certainty. In our experience, post-election years tend to be a little better in terms of military and defense sales. So that’s partly some of our thinking when we gave our guidance for mid-single digits in terms of Defense and First Response sales. That’s our view on defense post the new administration. It's hard to predict depending on policies and all kinds of legislative actions, but typically, we prefer the year after an election over election year disruptions.

Got it. And then what were the primary drivers of the cylinders revenue decline year-over-year despite the growth that you mentioned in alternative fuels?

A lot of the cylinders still go into what I would describe as discretionary medical or similar applications where we had elective procedures getting delayed last year. So there was clearly an impact on those products. There’s also significant demand for specialty industrial gases that remained slow. Likewise, SCBA, which you would see from others, was slightly lower given that many of the firefighters and others redirected their budgets toward other activities useful in the immediate fight against COVID rather than upgrading their equipment. So while these conditions are concerning, I would say they are driven by macroeconomic challenges last year.

Okay. And then one more question on SoluMag, if I could. I know that right before the oil collapsed last year, you were rolling out some new products targeted at freshwater applications in the Permian. I’m just wondering, did you begin to see sales there before we saw the oil price collapse and all the CapEx budgets being slashed? Or was that not something that was very meaningful in 2020?

We did see good penetration for the new product and actually had very successful field trials. We remain confident in our market value proposition in that sector. The recent sales we have had, although at a low level, are more geared towards our new products aimed at the Permian Basin rather than the Bakken, where our historical presence has been. We have further invested in and increased our investment in business development in that area. Given the rebound of oil prices at $60, I feel much more confident about SoluMag’s future than I was when it was negative. We just want to make sure we are diligent and focused on maintaining our strong, strong value proposition here.

Got it. And then just lastly for me, can you break out how much automotive business makes up your transportation silo?

Yes, I can take that one. Historically, prior to our divestment phase, automotive was about a third of the transportation segment, but now I would say it accounts for a lesser portion, closer to 20% or so, given the divestment activities.

Got it. That’s helpful. Thank you.

An encore recording of this conference call will be available in about two hours. Telephone numbers to access the recording will be available on the Luxfer website at www.luxfer.com. Thank you for joining us today. The next regularly scheduled call will be in April of 2021 when the company discusses its 2021 first quarter financial results. You may now disconnect your lines and have a wonderful day.