Luxfer Holdings PLC

Good morning. My name is Ashley and I will be your conference operator today. Welcome to the Luxfors 2021 fourth quarter and full year 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 Heather from Luxfors. Heather, please go ahead.

Thank you, Ashley. And welcome to Luxfors fourth quarter and full year 2021 earnings call. I'm Heather Harding, Luxfors Chief Financial Officer. With me today is Alok Mascara, Luxor's Chief Executive Officer, and Steve Webster, Luxor's Income and Chief Financial Officer. On today's call, we will provide details of our fourth quarter and full year 2021 performance as outlined in the press release issued yesterday. Today's webcast is accompanied by a presentation that can be accessed at Luxor.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 two of today's presentation for further details. Now, I will turn the call over to Alok for his summary comments, after which I will provide details of our fourth quarter and full-year financial results. After my remarks, Steve will provide guidance for 2022 and share our longer-term financial goals before Alok's closing. So, Alok, please go ahead.

Thanks, Heather, and welcome, everyone. Before I dive into the results, I want to thank Heather Harding for being Luxforce CFO and my business partner for the past four years. We wish her all the best in her retirement while we welcome Steve Webster as our new CFO starting March 1st. As a result of our talent management and succession planning processes, we are more than confident that Steve has the knowledge and experience necessary to be successful in this role. I also want to express my gratitude to the entire Luxfor team who continue to put our customers first while facing an unprecedented supply crisis driven by two of our primary suppliers declaring force majeure. I want to thank our customers for their patience and support through these difficult times as the Luxfer team races to overcome the challenges impacting our supply chain. Now, please turn to slide three for highlights from our fourth quarter and full year results. I want to highlight four key messages on this page. First, we delivered 20% year-over-year sales growth in the fourth quarter despite ongoing supply challenges, and we are pleased to report that our sales are higher than pre-pandemic levels on a comparable basis. Strong demand across our end markets was aided by solid revenue contributions from our SCI acquisition. Excluding the SCI acquisition, we achieved 10.7% organic growth and ended the year with record backlog, as we were unable to fully convert strong demand into sales. For the full year, sales increased 15.2%, while EBITDA increased 17.6%, despite manufacturing inefficiencies at SCI. Second, our full-year cash flow was strong. Even after we made a total of $18.2 million in payments to achieve zero pension deficit, based on our 2021 tri-annual valuation. In addition, we returned about $20 million to shareholders through dividends and share buyback in 2021. We continue to maintain a strong balance sheet with a net debt to EBITDA ratio of 0.8 times. Third, we expect to deliver revenue, EBITDA, and EPS growth in 2022, despite the supply uncertainties clouding the current outlook. EPS is anticipated to be in the range of $1.30 to $1.50 for the full year 2022. Finally, we are also introducing our 2025 EPS goal of $2 or more per share driven by aerospace macro recovery, elimination of SCI inefficiencies, supply chain normalization, and continued growth and productivity. Now please turn to slide four for an overview of the manufacturing and supply chain recovery status. We continue to experience strong end market demand, but our ability to fully convert demand into sales remains constrained by manufacturing challenges, including the evolving impact of COVID-19 on our workforce. In addition, we are experiencing unprecedented shortages of magnesium, zirconium, and carbon fiber, three of our primary raw materials. Currently, two of our primary suppliers are in force majeure, while many others are facing their own labor and material challenges. As an example, our recent performance and the 2022 outlook are being negatively impacted by magnesium supply constraints, as Luxfor's primary supplier, US Magnesium LLC, declared force majeure. To meet the needs of our customers, we are ramping up alternate overseas suppliers, but many of them are overwhelmed by global magnesium shortages driven by new power and environmental restrictions in China. While we were optimistic that this issue would be resolved by now, The shortage continues and is clouding our 2022 outlook. We look forward to continuing our long-term business relationships with our magnesium suppliers, including US Magnesium LLC, and returning to regular supply levels after the anticipated end of force majeure and magnesium shortages. In addition, we continue to face force majeure at Richards Bay Mine in South Africa which is our primary supplier of zirconium sand. We are ramping up alternate supply options, but are still unable to fully satisfy our current demand levels as we were forced to adjust production rates to match material availability. In addition to material availability issues, we are facing higher input cost with significant volatility for critical raw materials such as carbon fiber, aluminum, magnesium, and zirconium. We have implemented multiple adjustments in response to significant inflation and remain confident in our ability to fully pass through cost inflation over the long term. In the current volatile and high inflationary environment, the time lag to fully pass through cost inflation may be six to nine months, as compared to our typical time lag of three to six months. The cornerstone of Luxfor's response is our supply chain presence, expertise, our local manufacturing presence, and our long-term relationships with our suppliers. We remain confident in our ability to successfully navigate the supply crisis and improve our customer service levels. We are optimistic that the supplier force measures and uncertain inflation will be behind us soon so that we can begin accepting new customers and orders for impacted products in the second half of this year. Overall, we are confident that our established supply chain and localized manufacturing provides us with a sustainable advantage versus our competitors during this unprecedented time. Now, please turn to slide five for an update on the key growth drivers for the coming year. We continue investing in new products to capitalize on macro trends in our attractive end user markets, such as alternative fuel, healthcare, aerospace, defense and first response. Specifically, we expect magnesium growth in 2022 to be driven by continued recovery in the aerospace end-user market and from our recently introduced UGRE flameless ration heater products. In the zirconium line, we anticipate continued growth from our new products in the medical and electronics end-user market. In addition, growth from continued penetration of our gasoline particulate filtration product in automotive applications is likely to accelerate as the auto industry reverts to growth post-COVID and post-chip shortages. In the composite cylinder product line, we expect alternative fuel to continue growing double digits fueled by hydrogen storage and SCI acquisition benefits. Our revenues in 2022 are going to increase faster than volume as we will be passing on material and labor inflation to our customers. Steve will provide additional color on this when he discusses the 2022 outlook. Please turn to slide six for an update on SCI integration progress. We are pleased with SCI's performance and continued progress our team has made on cost synergy and integration activities. For the year 2021, SCI's financial performance was better than expected with double-digit year-over-year organic growth and positive operating cash. The EBITDA losses were at the low end of our expectations due to progress on driving cost synergies, even though some of the cost synergies were offset by inflation. We have driven cost synergies by successfully migrating the business to Luxfor's ERP system and spreading overhead costs through shared Luxfer resources. We have now improved efficiencies during the consolidations of operations into a single building in Pomona. We remain focused on improving SCI's output and on-time delivery through implementation of Luxfer Business Excellence Standard Toolkit. I would like to thank all our Gas Cylinders employees who have made this transition as seamless as possible for our customers. I look forward to offering our customers expanded technological capabilities, additional product offerings, and improved service. Now, let me turn the call over to Heather for details of our fourth quarter and full-year financials.