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spk00: Good morning. My name is Katie, and I will be your conference operator today. Welcome to the Luxfer's third quarter 2022 earnings conference call. All lines have been placed on mute. After the speaker's prepared remarks, we will hold a question and answer session. Now I will turn the call over to Mike Gaydon, Vice President of Investor Relations and Business Development for Luxfer. Mike, please go ahead.
spk01: Thank you, Katie. Welcome, everyone, to Luxfer's third quarter 2022 earnings call. With me today is Andy Butcher, Luxfer's Chief Executive Officer, and Steve Webster, Luxfer's Chief Financial Officer. On today's call, we will provide details of our third quarter and year-to-date 2022 performance as detailed 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 the 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. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise. 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 Andy for his summary comments on the quarter, after which Steve will provide details of our financial results. Andy will then provide some concluding remarks before Q&A. Andy, please go ahead.
spk05: Thank you, Mike, and welcome, everyone. Please turn to slide three. I'm pleased to share with you details of our third quarter performance, which includes year-over-year growth in both revenues and profit. I want to start, though, by expressing my appreciation to the entire Luxford team, who once again took on a challenging supply chain environment to serve our customers. our team's ongoing focus and dedication has helped to sustain the momentum of our first half results. On this slide, I want to highlight three key messages. Firstly, regarding our quarter three financial performance, we delivered nearly 10% year-over-year sales growth, continuing the gains realized in both quarters one and two. This quarter three revenue growth was primarily driven by our ongoing success in passing through cost inflation, which more than offset foreign exchange headwinds. Our Q3 adjusted diluted earnings per share of 35 cents continues our progress towards achievement of our existing four-year guidance. Electron again led our performance, driven by successful execution in a wide variety of end markets. Gas Cylinders continues to work through inflation-related challenges, passing through current cost increases wherever allowed by contract. Our capital position remains a source of strength, with a net debt to EBITDA ratio of 1.2 times. Secondly, we continue to see solid overall demand in Q3. We realized 30% revenue growth in the general industrial end market and 7% growth in defense, first response, and healthcare. Supply chain remains challenging with continued pressure on both material availability in some areas and higher costs. Although we are seeing some indications of slowing demand in certain European end markets, we still benefit from a healthy overall backlog at the end of Q3, well ahead of prior year. Thirdly, based on a combination of our sound year-to-date results and our assessment of the macroeconomic outlook and supply chain, we now expect to deliver 2022 adjusted diluted EPS of $1.35 to $1.40. compared to our prior range of $1.35 to $1.50, and we remain committed to achieving our longer-term EPS goal of $2 or more. We are also focused on cash flow conversion and mitigating the impact of higher material prices on our working capital levels. Turning to slide four, I would like to provide more details on the current business conditions. During the third quarter, we again realised a solid pace of overall order flow. We've seen early evidence of some modest slowing in certain European sectors, such as industrial gas cylinders and some magnesium rolled products. We are encouraged, though, by medium term demand for alternative fuel cylinders and for flameless ration heaters, among other products. We ended the quarter with a healthy order book upon which to execute through year end and into 2023. At the same time, supply chain challenges persist in certain key areas. I want to first update you on the force majeure status at US Magnesium. Towards the end of the quarter, the supply from US Magnesium for our powders business was halted while they undergo some essential maintenance. There is low impact to our business in Q3 and Q4 due to the strategic stocks we have in place. And with the support of our customers, we've secured some limited supply from an alternative supplier to cover medium-term demand. We're underway with initial work to qualify this material. We're also seeing sustained tight supply conditions for aramid aerospace fibre and zircon sand, although our work on identifying alternatives is gaining momentum. The availability of manufacturing labour has improved somewhat, although still limits our ability in certain areas to capitalise on strong demand conditions. Great bottlenecks have reduced, which is helpful. We continue to work through the latest market developments, including volatility around energy and raw material costs, most notably the higher electricity prices in Europe and the continued increases in the cost of carbon fibre. New activities on further cost pass-through are underway in response to these. While the strong dollar has served as a headwind to our revenue results, It has brought a positive impact to our bottom-line results year-to-date. We are also pleased to acknowledge the incremental long-term positives brought by the passage of the Inflation Reduction Act in August, which will help the development of the domestic hydrogen market. Given this backdrop, we continue to emphasise a tactical focus on successful execution, with close coordination with both customers and suppliers. We also remain ready to respond to any softening macro conditions. As part of this, we've built a recession case scenario into our medium-term planning, which recognises the risk of further weakening in the outlook for the global economy. This brings the possibility of lower demand in 2023 and the need for us to manage discretionary spend, although this would likely be accompanied by an easing of the supply chain constraints, which have provided a headwind to us throughout the year. You will also remember that our balanced portfolio holds many diversification benefits, including supply to resilient industries like defence, first response and healthcare. Our top line also benefits from the recurring replacement cycles associated with a number of our products. From a cost standpoint, we benefit from our simplified manufacturing footprint and the ability to adjust capacity and to pivot our cost profile. Our low leverage and our high liquidity position also bring flexibility. For all these reasons, I remain confident in our business performance, even if macroeconomic conditions slow. Now, let me turn the call over to Steve for details on our third quarter financial performance.
spk06: Thanks, Andy. I'll begin on slide five of the summary of our performance by end market. In the defense first response and healthcare end markets, quarter three sales rose by 6.8% as growth in defense aerospace alloys and medical cylinders more than offset lower demand for flameless ration heaters, which is expected given low levels of U.S. troop deployment in the field. Quarterly sales in transportation decreased 6.1%. Contraction in alternative fuel sales more than offset expansion in the autocatalysis and commercial aerospace end markets. which continue to rebound towards pre-COVID levels of activities. We expect alternative fuels to build upon the sequential improvements seen in Q3, amid signs of deepening commercial commitment to hydrogen transportation and storage applications, backed by government funding initiatives. Our general industrial sales grew 30% year-over-year in Q3, leading our overall revenue expansion for the quarter, Electron sales increased in nearly all industrial categories, continuing the broad-based strength in quarter two. Commercial magnesium powders, zirconium applications and raw industrial products fueled this industrial strength. Overall, we're encouraged by Q3 sales results, helped by our differentiated product offerings. Now please turn to slide six for a summary of our third quarter financial results. Third quarter sales of $100.2 million increased $9.0 million, or 9.9% from the prior year. Our quarterly revenue benefited from $13.3 million of price actions taken to address input cost increases, as well as from volume and mix contributions of $0.6 million. We experienced foreign exchange headwinds of $4.9 million, meaning sales revenues increased by 15%, excluding foreign exchange. Consolidated adjusted EBITDA of $16.1 million for the quarter increased $2.3 million or 16.7% from the prior year, helped by our success in passing along inflationary costs and growing volume in the challenging environment. FX contributed a positive $0.8 million to EBITDA and our active cost reduction and efficiency efforts added another $0.7 million. We're pleased with our quarter three year to date performance amid the challenges posed by the current operating environment. Now let's review our segment results on slide seven. Electron revenues of $56.8 million increased 24.6% from the prior year, driven by our timely efforts to pass through inflation, as well as sustained strong demand in our transportation and industrial end markets. Our electron EBITDA of $12.7 million increased by 51.2%, helped by strong execution, foreign exchange uplift, and ongoing cost-saving initiatives. Gas cylinder segment sales of $43.4 million decreased $2.2 million, or 4.8% from the year-ago quarter, driven by a $2.6 million adverse foreign exchange impact. EBITDA of $3.4 million decreased $2.0 million in the prior year, as timing constraints on our ability to push through cost inflation on certain contracts detracted from profitability. As a reminder, we've taken actions where permitted to recoup materials inflation, which will start to bear fruit from quarter one of next year. Now let's turn to our key balance sheet and cash flow metrics on slide eight. Luxor's capital position remains one of our key business strengths. Our balance sheet continues to enable us to support our customers amid the strained supply chain seen in recent quarters. We generated $1.3 million of free cash flow in Q3, up from the $0.6 million delivered in Q2. Though our working capital at 29% of annualized sales exceeds our targeted range, we are finding that our ongoing investment in inventory is serving as a key differentiator in our customer first strategy. Accelerating sales volumes realized within the quarter further contributed to our elevated working capital position at the period end. We remain committed to our long-standing 21% to 23% working capital target and project this to be nearer 23% to 25% at year end. We will progress back towards the target level when supply chains normalize. Our net debt of $75.6 million and related net debt to EBITDA ratio of 1.2 times afford flexibility that serves us well in the current climate. Our trailing 12-month ROIC of 14.7% demonstrates the investment attractiveness of the Luxor platform. Let's now review our updated 2022 financial guidance on slide 9. Given the current macroeconomic outlook and supply chain challenges, we now expect to deliver full-year adjusted EPS of $1.35 to $1.40. We also currently project 2022 revenue growth of 9% to 12%, constrained by the negative impact of foreign exchange translation, certain raw materials availability, and the aforementioned signs of softening demand in Europe. On foreign exchange, a weak pound is generally favourable to the profitability of our UK business, with a sizeable portion of sales invoiced in currencies other than sterling, complementing a lower operating cost base when translated into dollars. However, given that many of the key inputs of the UK are sourced from the United States, the actual impact can be somewhat variable. We expect 2022 capital expenditure of $8 to $10 million, and while we are scrutinising investment plans amid signs of a softening macroeconomy, we remain confident in our ability to back our many rewarding long-term growth opportunities. As we've said previously, we expect no pension contributions in 2022 compared to our $18 million contribution in 2021, and we expect exceptional restructuring cash outlays of around $10 million for the year. Given the challenges posed by the external environment, we're very pleased to remain on track to deliver full-year EPS results within our existing 2022 guidance range, and we remain committed to our $2 or more long-term EPS goal. Finally, I'd like to review our capital allocation priorities on slide 10. We continue to employ a balanced approach to redeployment of free cash flow. Overall, Luxfer operates from a position of capital strength, which is an advantage against the backdrop of an evolving business climate. We prioritize reinvestment in our business as the highest return and lowest risk use of our growth capital, and we're proceeding judiciously in the current environment. We do expect this investment in innovation and productivity to drive our organic revenue and profit growth over time. During quarter three, we again accelerated our share repurchase activity. Year to date through the third quarter, we've repurchased $6.9 million of shares, which already outstrips the $6.4 million total for all of calendar 2021. We also continue to scrutinize and add to our bolt-on M&A pipeline for opportunities that meet our selective growth and return objectives. Recent macroeconomic developments reinforce the importance of our discerning framework for acquisitions. This balanced approach to investing our free cash flow has served us well historically and will generate positive outcomes in the current environment. I now would like to turn the call back over to Andy. Andy?
spk05: Thank you, Steve. Before concluding our prepared comments, I would like to reflect briefly on two milestones reached this year, as well as our growth strategy development. Please turn to slide 11. 2022 brings the 125th anniversary since our founding in Chicago, as well as the 10th anniversary of our public listing on the New York Stock Exchange. We have accomplished much since we began manufacturing innovative glass prisms back in 1897. and I'm proud to have been with Luxfer for 30 years of this journey. As I think about our mission to help to create a safe, clean, energy-efficient world, I want to highlight some of our successes. Delivering technological advances that have reduced the weight of breathing apparatus cylinders by using carbon fibre, helping to increase safety for first responders. Introducing proprietary magnesium alloys that have enhanced the capabilities of commercial and military aircraft. supplying fully integrated systems for the hydrogen market across varying transportation modes, which are contributing to a cleaner environment. Developing zirconium and magnesium-based solutions aimed at lifting the performance and reducing the costs of both rechargeable batteries and fuel cells. Supplying safe, flameless ration heaters to those impacted by natural disaster, including recent shipments to those affected by flooding in Kentucky and by Hurricane Ian in Florida. And finally, simplifying our facilities and our footprint to manufacture our products in a more integrated, more flexible, more automated and ultimately more sustainable way. These successes and many others provide a great platform and we are resourcing the whole Luxford team to continue to build on this platform to deliver long-term profitable growth. Now I would like to discuss one of the key tools that will enable our future success, the Lux for Business system. Please turn to slide 12. On our last call, we talked about the successful work of the last five years to simplify our manufacturing footprint, our product range, and our cost base. We discussed the opportunities that this now creates over the next five years for a focus on profitable growth. and how this drive needs to be supported by the development of an enhanced internal operating model. Over the last four months, we've created a definitive outline of what we're calling the Lux for Business system. Customer commitment and growth form the very center of our framework. And to deliver this, we will execute best practice in six critical areas, carefully selected after reviewing operating models in other leading manufacturing companies, as well as evaluating the many pockets of excellence already existing within Luxfer. Detailed developments of all areas of the business system are underway, personally led by some of the key members of our leadership team. I was excited over the last few weeks to participate in global Luxfer conferences on both sustainability and lean operations, and I look forward to the execution of these programs, which we will introduce in stages over the next 18 months. In many ways, my confidence in the medium to long-term opportunities for our business has improved over the last three months. Government incentives are helping to propel U.S. investment in clean energy. The aerospace market is recovering and is requiring lightweight materials. Demands for products related to safety, health, and technology are accelerating. We will continue to focus on near-term execution while also taking action to invest with confidence for our long-term growth. The Luxfor business system is a key part of this. Now I would like to conclude by highlighting briefly our strong position for value creation. Please turn to slide 13. As you know, Luxfor's mission is to help to create a safe, clean, and energy-efficient world with leading products that generate attractive financial returns we are working to harness the tailwinds of secular growth embedded in our portfolio. We are bringing to market innovative products that target compelling commercial opportunities to further unlock value for our shareholders. There is a bright future ahead of us. We've been pleased to share our quarter three results with you today, and we are focused on sustaining our momentum into year end and beyond, Now, I would like to turn the call over to the operator to begin the Q&A session. Casey, please go ahead.
spk00: Thank you. At this time, if you would like to ask a question, please press star 1 on your touchtone phone. You may remove yourself from the queue at any time by pressing star 2. Once again, that is star 1 to ask a question. We will pause for a moment to allow questions to queue. Thank you. Our first question will come from Chris Moore with CJS Securities. Your line is now open.
spk03: Good morning, guys. Thanks for taking a couple of questions. So, good morning. You talked about early signs of softness in Europe affecting gas cylinders and graphic arts. I was hoping maybe you could go just a little bit further there.
spk05: Yes, thank you, Chris. Good to talk to you this morning. Yes, those would be the two areas in Europe that have impacted our outlook for Q4 a little bit. So in the gas under business, the specialty gas industrial market that can go into some electronic applications and some environmental applications, as well as some calibration gas applications, we've seen a reduction in the order intake over the last four or six weeks there. And then on our rolled product side for graphic arts, we've also seen lower bookings there for quarter four. Now, that's balanced to a certain extent by some stronger orders now coming in on some of our magnesium products, SCBA cylinders, and alternative fuel. But, yes, we've seen some early signs of slowing in Europe.
spk03: Got it. Helpful. So it looks like pricing still in catch-up mode in gas cylinders, you know, as you talked about constrained by contractual pastors. If I heard correctly, you will start seeing improvement there in Q1, is that right?
spk05: Yes, so we're passing through our material cost increases to customers wherever allowed by contracts and agreements, and I think you'll have seen overall 99% year-to-date of our cost increases have been recovered, so we're encouraged by that. In gas cylinders, I guess two different elements to this are European business, where we tend to have more spot business, And here we've just gone through our latest round of increases on both aluminum cylinders and alternative fuel cylinders. And then there's a composite business where we do have some spot business where prices have already moved and some customer agreements that we're navigating. And a decent-sized segment of business where we realized carbon pass-throughs in January of 2023, all of which is communicated to customers. So that's helpful. Now, as I think we discussed before, we don't fully catch up until carbon prices normalize, by which I mean carbon prices stop increasing and perhaps even decreasing. But overall, yeah, 99% year-to-date of our cost increases have been recovered across the business.
spk03: Got it. I appreciate that. Last one for me is just you had previously discussed the target of $2 plus adjusted EPS by 2025. Today's presentation just characterized it more as a long-term adjusted EPS goal without specifically saying 25. Anything that we should read into that?
spk05: We certainly remain committed to the 2025 goal and to the $2 EPS level, so no change to that. Of course, we're conscious of the macroeconomic changes that we're seeing at the moment, and we're thinking carefully about 2023, but we still at this time expect to deliver the $2 EPS in 2025. Thanks for the clarification on that, Chris.
spk03: Got it. I will leave it there. I appreciate it, guys. Thank you.
spk00: Thank you. Our next question will come from Phil Gibbs with KeyBank Capital Markets. Your line is now open.
spk04: Hey, good morning.
spk05: Hi, Phil.
spk04: In terms of Europe, can you just remind us what your total revenue exposure there is in terms of your – just as a percentage of overall sales. And then I know you also have a decent amount of production within Europe as well. So maybe kind of frame up how we should be thinking about the production footprint in light of all the energy price increases that we've been seeing in that region and how you're managing through that.
spk05: Yes, thanks. So in terms of our revenue breakdown, a little over 60% in North and South America, a little over 20% in Europe, and a little under 20% in Asia. Obviously that varies over time, but that's typically how you see our revenues. In terms of our manufacturing footprint, the weight of our footprint is in North America, two facilities in the UK, one of those, the Nottingham plant, making aluminum cylinders and assembling alternative fuel systems, and then our Electron plant involved in both making magnesium and zirconium. So that's the footprint. Steve, anything to add on that?
spk06: No, I think that's fair enough. Did you also have a question, Phil, on energy costs?
spk04: No, just in terms of those two assets in the U.K. in terms of how you're managing through the energy cost escalation there, at least in terms of what we're seeing broadly if you're hedged or whether or not you've got some other things going on to manage through that.
spk06: Yeah, I mean, we're clearly on energy. We're keeping a close eye on the market. And we do have an opportunity, especially in Europe, to do some hedging. So we will project forward up to two years in terms of our energy needs as we see them in Europe. And we can forward by... up to 100%, or potentially even more of our needs, and then obviously sell back if we overbuy. But we keep an eye on the forward prices, and if we see a price that suits, then we will lock it in. But there's a certain amount that will stay on spot. In North America, we're more on contract, and those contracts certainly run They're current at the moment, but some of those come to an end sort of early next year. And then we're obviously in negotiations for new deals. And there will clearly be some uplifting cost over and above what we've been paying to date.
spk04: Okay. And then as we look at networking capital in Q4, typically seasonally, it's a release. And I think you may be pointing to that. How much of a release should we expect if that's the case for Q4? And then second question, what's in there within the cash side? Is this cash restructuring? You mentioned $10 million for the year. How much of that has to be let out in Q4? Thank you.
spk06: okay um yeah the first point so uh yeah you you've you've obviously seen our working capital remains elevated and as i said in the uh in in the the prepared remarks that's very much an investment in inventory which continues we've always said that if the supply chain is uh continuing to be uh challenging we would uh we'd keep that we'd envision that level being elevated We are still seeing those challenges, so hence it's not come down. In fact, it's gone up sequentially. We would expect it to come down to, I said, 23% to 25% of annualized revenue in the fourth quarter. I think that's a reasonable expectation. it will free up some cash. Although I think we're not going to start making significant cash contributions and inroads into our current net debt level, probably until quarter one next year. And even, I think, if supply chain conditions don't normalize completely in quarter one, I expect quarter one to be better than quarter four in terms of cash generation. Sorry, you had a second part of your question.
spk04: So the cash restructuring you outlined in your deck, how much of that is left in Q4?
spk06: There's about $1 to $1.5 million we're expecting to go through in Q4.
spk04: Okay. Thanks so much.
spk00: Thank you. Again, if you would like to ask a question, please press star 1 to join the queue. Our next question will come from Chip Moore with EF Hutton. Your line is now open.
spk02: Good morning. Thanks for taking the question. Wanted to follow up on potential recession scenario planning you talked about. It sounds like you have some levers you can pull if the environment does take a turn for the worse. I guess, how do you balance any of those near-term uncertainties versus the medium-term demand that you see on the horizon?
spk05: Yes, thanks, Chip. Good morning. We have built a recession case scenario into our medium term planning as an option. That works quite advanced. It's not completed yet. And of course, we're seeing volatility in economic indicators at the moment. Whatever happens, I think we're properly preparing for that. We like the mix in our portfolio and the strength in our balance sheet. So we're very conscious and alert to market developments. At the moment, though, we like where our order book is sitting. We have a good order book for quarter four. Most of our markets are booking well into quarter one and quarter two. So we're pleased about that. We like what we're seeing next year, particularly magnesium alloys, In STBA cylinders, we expect alternative fuel to continue some of the momentum we picked up in quarter three. So we like what we're looking at in the order bank. We're just making sure that we're not naive. We're alert to what's happening in the outside world. But approaching 2023, I think, and beyond with a spirit of optimism.
spk02: Perfect. Thanks, Andy. And maybe as a follow-up, just on innovation in terms of the new product pipeline, maybe you can kind of walk us through what to expect there over the next, you know, 12 to 24 months, and then look back at some of the more recent areas that you're excited about, how those are progressing.
spk05: Yes, so it's been exciting over the last three months to be reviewing the commercial opportunities that we're seeing with the new products. So thanks for the chance to comment on that. I think some of the things I'd like to highlight would be maybe our zirconium solutions for electrolysers and fuel cells, the magnesium electrotechnology for rechargeable batteries, I'm pleased with the progress on the Rotamag alloy for lightweighting in high-performance automobiles. The pharmaceutical zirconium product that we have is finding some good use in the growing medical application. We're starting to replace some of our old Aramid Aerospace cylinders with lightweight carbon versions. The Type III hydrogen cylinders are doing well with fast-filling technology. Magnesium roll products, unitized group rations for heating. I could go on and on and on. I really like what the business is doing on some of the new product developments.
spk02: Yes, it's good to hear. And just a last follow-up on that. I mean, just in terms of flexibility, right, you're very flexible. You've been active on the buyback, and the leverage is quite low. M&A, are you seeing more on the full-time side, maybe in some of those innovative areas, or are you thinking more organic?
spk05: Thanks. Yes to both of those. So our pipeline remains active. We're seeing some evidence, I guess, of slowdown in transactions done in the market. We remain engaged. We visited a potential target a couple of weeks ago. We've got a meeting coming up next week, but nothing imminent, all early stage. Valuations seem to remain pretty high. We've not yet seen much of a multiple correction. I'd expect that to change. But we do remain selective, especially given the macro uncertainties. So I'd say we're active and alert to possibilities, but we continue to prefer reinvestment in organic growth as the best use of our capital. Yeah, makes sense.
spk02: Thanks very much. Thanks, Geoff.
spk00: Thank you. This does conclude today's Q&A. An encore recording of this conference call will be available in about two hours, and a link to a recording of this webcast will be available on the Luxford website at www.luxford.com. Thank you for joining us today. The next regularly scheduled call will be in Q1 of 2022 when the company discusses its fourth quarter 2022 financial results. This ends the Luxford conference call. Have a great day.
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