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spk00: Good morning. My name is Shelby and I will be your conference operator today. Welcome to Luxfer's fourth 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 from Luxfer. Mike, please go ahead.
spk03: Thank you, Shelby. Welcome, everyone, to Luxfer's fourth 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 fourth quarter and full year 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 and our outlook, after which Steve will provide details of our financial results and 2023 guidance. Andy will then provide a longer-term view before Q&A. Andy, please go ahead.
spk02: Thank you, Mike, and welcome, everyone. Please turn to slide three. I'm pleased to share with you highlights of our fourth quarter performance, which includes growth in sales and in adjusted EPS. the Luxor team once again stepped up to deliver for our customers, in turn helping us to realize full year earnings per share in line with guidance. I'm grateful for our team's ongoing focus and dedication. I'm particularly pleased to report that volume growth accelerated in quarter four to $9 million, with both Electron and Gas Cylinders posting their best volumetric performance of the year. This strong quarter four reinforces our confidence in our long-term plans for profitable growth. We saw higher input costs once again during the quarter, and we continued taking actions to pass through these changes wherever allowed by contract, including additional increases at gas cylinders. Overall, though, higher costs and some operational disruptions limited the profit uplift from our incremental sales. Our executional focus helps us to translate our higher sales and earnings into expanded free cash flow, and the $15.9 million generated in quarter four exceeded our expectations. Looking ahead, we're seeing softness in European demand and areas where customers are destocking. However, we're also driving important orders in some of our focus areas of growth, including aerospace, defense, and hydrogen vehicle systems. I would now like to turn to slide four to provide a brief update on the encouraging secular growth trends driving our business. During the fourth quarter, gas cylinders posted its best alternative fuel performance of the year. Capitalizing on increasing interest in green energy, we executed successfully on elevated demand for our lightweight composite cylinders for the bulk gas transportation of both hydrogen and CNG. Additionally, A step up in passenger car manufacturing, coupled with ongoing stringent particular emissions regulations, is fueling demand for our autocatalysis zirconium products. The multi-year recovery in commercial aerospace continues, driving sales of our lightweight magnesium alloys, along with our in-cabin oxygen and inflation cylinders. We are also encouraged by the improvements in the supply chain for SCBA safety products, as well as the opportunities we see in healthcare for both our electron and gas cylinder segments. Against this background, I will now outline some of the key drivers of our 2023 outlook on slide five. We see a mixed outlook for our end markets in 2023, but nevertheless, we continue to expect overall volume growth. Sustained recovery in aerospace and automotive markets remains a notable tailwind for our transportation offerings. We are seeing ongoing demand in first response for our SCBA cylinders. While in defense, we anticipate higher aerospace, flameless Russian heater, and chemical kit sales. Alternative fuels will continue to be choppy. We anticipate hydrogen vehicle systems growing incrementally through the year, although lower requirements for bulk gas products. Some of our industrial offerings are seeing softness, particularly in Europe, and notably we're experiencing some transitory destocking by customers. However, we expect the secular drivers of our business to more than offset these isolated cyclical pressures as the year develops. We're working on several important initiatives to ensure our success amid key developments in the supply chain. U.S. Magnesium LLC, the U.S. domestic source for raw magnesium, remains in force majeure, and the facility is not currently supplying magnesium. We've made good progress with efforts to qualify an additional source of supply for the U.S. military. Indeed, that work is successfully concluded for flameless ration heaters and well advanced for military flares. While this has been completed, we expect lower military flare sales in Q1 and early Q2 before resumption of a more normalized cadence over the rest of the year. In gas cylinders, we continue to address the inflation seen in raw materials, most notably carbon fiber. As part of this effort, we initiated further cost pass-throughs as of January 1st. We're now permitted by contract. We are also working to remove additional fixed costs in this part of the business. We have already taken action during Q1, which will save more than $1 million annually while we work to recover margins. More broadly, we continue to see improving conditions across the supply chain. However, input cost inflation continues for several key materials, The cost of basic chemicals used in the electron segment continues to increase, for example, and energy costs remain elevated. Combined, these demands, supply chain and pricing dynamics, as well as our efforts to address and counter these impacts, suggest a low Q1 with quarterly EPS improving thereafter. Steve will discuss guidance shortly. First, though, starting with details on our fourth quarter financial performance.
spk01: Steve? Thanks, Andy. I'll begin on slide six of a summary of our performance by end market. I'm pleased to report that we experienced growth in each of our end markets during the quarter. In defence, first response and healthcare, we realised 19% growth on the back of strong military demand. Defence aerospace alloys, flameless ration heaters and chemical kits propelled our increased sales in this end market, while first response and healthcare held largely steady. Transportation sales rose nearly 24%, with all subcategories higher. Both autocatalysis products and our Rotomag performance wheels alloy benefited from strength in the automotive market. Alternative fuels realized a second consecutive quarter of acceleration amid ongoing commercial adoption of hydrogen for transportation. Commercial aerospace also contributed meaningfully to sales growth. General industrial sales expanded 13%, helped by demand for Solimag, as well as commercial applications for magnesium powders and zirconium for industrial catalysis. Graphic art sales of magnesium plates slowed, however, which was influenced by competition and macroeconomic conditions, particularly in the consumer sector. We're encouraged by these sales results, which reflect the unique attributes of our product portfolio, as well as the long-term attractiveness of our end markets. Now, please turn to slide seven for a summary of our fourth quarter financial results. Fourth quarter sales of $116.7 million rose $18 million, or 18% from a year ago. This growth came from both $9 million of positive contribution from volume and mix, as well as $13 million of price actions to offset rising input costs. Excluding $4 million of adverse foreign exchange movements, our underlying sales grew 22% on a constant currency basis. Consolidated adjusted EBITDA in quarter four decreased $0.6 million, or 4%. Despite our actions to pass through inflation, cost increases of $13.6 million in the quarter offset our pricing initiatives. While we realized a healthy margin on our incremental volumes, adverse production variances and growth-related headcount investment curtailed our overall profit for the period. Furthermore, we incurred in excess of $1 million of costs associated with the defense of a legal matter relating to the disposal of magnesium powder waste materials in 2018, which has been disclosed in our Form 10-K. We expect this higher rate of expense to continue throughout 2023 and into early 2024. Overall, we remain focused on navigating the dynamic pricing for our raw materials, while also managing costs within our control. To this end, further price actions have been initiated from the start of 2023. Now let's review our segment results on slide 8. Electron sales of $64.9 million increased one-third from the prior year, driven by our sustained push to pass through inflation and a $5.4 million uplift from volume and mix, the best performance of 2022. Electron's EBITDA expanded by 28% to $11 million, helped by incremental volume and mix and effective cost pass-through, as well as foreign exchange. Gas cylinder sales of $51.8 million rose to $1.8 million, or 4%, led by a $3.6 million uplift from volume and mix, also the best performance of 2022. Pass-through initiatives contributed another $1 million. Combined, these factors more than offset the $2.8 million adverse sales impact from foreign exchange. EBITDA of $3 million declined from $6 million in the prior year due to timing of cost pass-through on certain contracts, partially offset by improvement in volume and mix and cost-saving initiatives. Now let's turn to our key balance sheet and cash flow metrics on slide 9. I'm pleased that our fourth quarter sales and earnings translated into further gains in our already sound capital position. We generated $15.9 million of free cash flow in quarter 4, the third consecutive quarterly acceleration. This free cash flow, in turn, helped us reduce net debt by $7 million sequentially and improved our leverage to 1.1 times. Operating working capital as a percentage of sales contracted 530 basis points sequentially to 23.9%, in line with the 23% to 25% range that we outlined during our Q3 earnings call. Our trailing 12-month ROIC of 14.9% illustrates the compelling profile of the Lapsa platform. We repurchased $4.2 million of stock during quarter four, demonstrating our ability to dynamically allocate capital. Let's now turn to our 2023 financial guidance on slide 10. Taking into account the macroeconomic and end market factors Andy outlined earlier, we currently expect to deliver 2023 full-year adjusted EPS of $1.15 to $1.35. Our projection of 6% to 10% sales growth, roughly evenly split between additional volumes and price, underpins this EPS outlook. Though we project underlying EBITDA similar to the prior year, higher legal interest and tax expense of 10% to 15% per share constrains our EPS expectations. Broadly, we expect quarterly EPS to accelerate into the middle and back half of the year, with quarter one results limited in gas cylinders, particularly by project timing affecting alternative fuels. Additionally, in electron, destocking is impacting solumag, and finalisation of the qualification of alternative magnesium materials will result in a temporary pause in our magnesium flare sale to the military. Overall, quarter one adjusted EPS is likely to be in the range of 20 cents, with strong improvement thereafter. We expect free cash flow to expand year over year in 2023, helped by lower restructuring cash expenditures, as well as our continued focus on working capital management. We plan to reinvest a portion of this incremental free cash flow into high visibility growth projects within Electron and in alternative fuels. Given an improvement in the funding position, we again expect no contribution to our UK pension plan in 2023. Furthermore, we aim to buy out our US pension plan in the first quarter for around $3.5 million to eliminate this liability and further simplify our balance sheet. While acknowledging that our 2023 adjusted EPS is constrained, this 2023 plan advances our effort to drive incremental volumes and free cash flow. while also reinvesting for organic growth and further solidifying our attractive capital position. And now I'd like to turn the call back over to Andy. Andy? Thank you, Steve.
spk02: I will now provide an update on two key areas of focus, our path to $2 in adjusted earnings per share and how that goal is supported by implementation of the Luxor business system. Please turn to slide 11. To advance to our long-term EPS goal, our pathway includes three key aspects. We target 33 cents from profitable organic growth. We expect both new products and growing secular demand in key areas of our business to drive these incremental profits. This will include further development of the hydrogen market, which for gas cylinders remains the largest source of potential growth over the next several years. Within our electron segments, we expect to drive success in newer commercial products in both magnesium and zirconium, along with expanded military products from Magtech Solutions. Additionally, the return of more normalised operating conditions in the European industrial sector relative to the current 2023 baseline should also contribute. We anticipate another 29 cents from margin recovery, The gas cylinder business in particular has been impacted by outsized increases seen in carbon fiber, energy and labor costs. Our expectations are for a period of stability to emerge in these areas, which will provide an opportunity for margin recovery. We will also benefit from structural cost savings in both our powders and gas cylinders businesses. In addition, we expect 13 cents of uplift from lower legal and finance costs, including the end of the currently elevated legal charges that Steve outlined. As a leadership team, we hold a clear line of sight to this $2 plus EPS goal. All across the business, we are actively working towards its attainment. The Lux for Business system is one of the key tools that we're employing to deliver both growth and customer satisfaction. Please turn to slide 12. On our last call, we introduced our enhanced internal operating model, the Lux for Business system. Key members of our team are working to develop and implement the components of this program, which will serve to unlock the growth potential embedded in our business. Sustainability forms one key element of the model. Today, I'm highlighting here our second biannual sustainability report that's published in December. I encourage you to review the report when convenient. you will see that Luxford achieved a 30% decrease in absolute emissions at the end of 2022 compared to 2021. I'm proud of the advancements our team has delivered on key ESG goals in the last few years, and I look forward to reporting our incremental progress to you and our customers in the future. And let's conclude by refreshing briefly on Luxford's strong position for value creation. Please turn to slide 13. Luxford's mission to help to create a safe, clean and energy efficient world continues to grow in relevance and importance. We're working to harness the tailwinds of secular growth embedded in our portfolio with our market leading products that generate attractive financial returns. Combined with our efforts to drive innovation and address our many compelling commercial opportunities, we see a bright future ahead of us. Now, I would like to turn the call over to the operator to begin the Q&A session. Shelby, please go ahead.
spk00: At this time, if you would like to ask a question, please press the star and 1 on your touchtone phone. You may remove yourself from the queue at any time by pressing star 2. Once again, that is star and 1 to ask a question. We will pause for a moment to allow questions to queue. And we'll take our first question from Phil Gibbs with KeyBank.
spk05: Hey, good morning.
spk02: Good morning, Phil. How are you?
spk05: Good. Can you talk a little bit about the legal and tax and interest that you're speaking of specifically? I mean, I think you started off by saying underlying EBITDA is similar year on year in Q1, but then you have these other items. So maybe just talk talk to those, those things.
spk01: Yeah, thanks, Phil. I'll take that. Yeah, first of all, the legal. I mean, obviously we can't go into too many details about the case itself over in what's disclosed in our 10K, but in terms of cost, yeah, so it basically picked up a little bit in the year. In quarter four, we saw in excess of $1 million. So we're expecting that run rate to continue throughout 2023. So you can see there at least $4 million of legal costs. Interest, I mean, there's two factors there. Clearly, the level of borrowing that we have is slightly elevated at the moment, but also the interest rates are higher. So we're paying around about 6% to 7% of our incremental borrowing rate, which is historically quite high. So basically, that will be driving a higher interest cost. Clearly, as we generate free cash flow, and we're expecting to do so through this year, then our borrowings are going to come down But that will have an incremental effect on or basically it will detract from our profitability in 2023. Finally, the tax. I think we talked about tax rate before in the UK. So it has been enacted and it's going ahead. The corporation tax rate in the UK is going up from 19 to 25 percent from April. 60, 70% of our profits are in the US, so the rest are roughly in the UK. So just taking a weighted average, that sort of drives an increase in our ETR to around about 23% we're modelling. So combined there, you can see the sort of impact on the on our EPS. EBITDA, as we say, underlying excluding illegal costs, which obviously is a normally illegal EBITDA matter, but if you strip that out, our EBITDA is round similar number to, or expected to be round about a similar number to what we've had this year.
spk05: Thank you for that. And then as it relates to defence, I think you started off the call by saying that there's a good outlook for aerospace and defense and throughout things like flameless ration heaters and decontamination and military flares, but then also said that there's sort of a bit of a buying hiatus in the first part of the year. So maybe take us through the full year outlook and then the thoughts behind the timing.
spk02: Yes, this is Andy. Hi Phil, I'll cover that. So yes, we're modelling aerospace stronger in the year, both defence and commercial, so we're pleased with the outlook there that benefits both magnesium and our cylinders business. Flameless Russian heaters and chemical kits have ticked up nicely, so we're projecting a consistently strong year in those areas. In terms of the military flares, we will see those down a little in quarter one and quarter two. That's all about the outage going on in US magnesium. And as you heard, we've identified a second source of supply, an additional source of supply that's approved for flameless ration heaters. The approvals are very well advanced for military flares. Indeed, some of the military flares are already approved, but these are sophisticated alloys and powders. So there's maybe one to three months still to go to approve all of those. And then we'll see that pick back up at a normalized sort of cadence as we go through the year. So broadly, yes, aerospace and defense for the year will be positive to us.
spk05: And as we think about the business in the entirety, is it fair, maybe just excluding some of these legal costs for now, is it fair to think that You've got some price cost challenges in Electron and then some price cost improvements with some of the new contracts you've written in cylinders. Is that broadly a good way to think about it?
spk02: Maybe a little bit different to that. So we're pleased with what was achieved last year on the cost pass-throughs. I think nearly 94% of our increased costs were passed through in quarter four. So that was good. In cylinders last year, at the start of the year, for example, it was only 12% of the business in composite cylinders where we were able to pass on all of our costs. That increased to about 40% as we started this year. Further contracts roll off, and by the end of the year, that's up to 70%. So some good progress on cylinders, but still some restrictions in place. In Electron, we've been successful in passing through costs, as you commented. So improving situation overall. Thank you.
spk00: And once again, to ask a question, please press star 1. We'll take our next question from Chip Moore with Jeff Hutton.
spk04: Morning. Thanks for taking the question. I wanted to ask about the 25 targets. If you think of handicapped biggest risks, I think you'd You talked about maybe expecting some normalization in the European area, for example. Just curious about some of the underlying market assumptions.
spk02: Yeah, thanks, Chip. We're pleased to be able to share some of the details behind that $2 EPS. goal in this call. I think overall the goal I've categorised as suitably ambitious and as achievable. If we think about some of the risks to that, the lowest risk must be on the 13 cents that we have related to legal and financial. I just don't see the one-off legal situation extending into 2025 and our cash generation should lead to lower finance models I guess there's an incrementally higher risk associated with the margin improvement part of the model. We do have strong value propositions, but we recognize customers have options and competitive forces will have some impact. The highest risk in the model must be around profitable growth. Market and product development offers uncertainty, but we really like Luxor's tie-in to secular growth. the uh some of the industrial constraints in uh in europe we believe will uh will alleviate uh we've got this great foundation of decades of experience in hydrogen and confidence in the magnesium and zirconian teams based on their proven track records and uh we're investing to make it happen chip perfect that's helpful um and to definitely just maybe my follow-up um
spk04: maybe you can expand on some of the more recent investments and some of the areas you're investing in, just in terms of newer products, you know, reception and what you're excited about on the horizon.
spk02: Yeah, so we do have elevated capital investment in 2023 that we're pleased about. We're targeting $12 to $15 million of capital investment in Just over half of that goes into the multi-technologies part of the electron business around magnesium alloys and zirconium, maintaining our infrastructure and ensuring we've got the growth capacity we need in those areas. And then a significant part of the remaining capex is allocated to gas cylinders, including hydrogen capabilities. So no shortage of good opportunities for investment, frankly. So we've prioritized those that support our profitable growth, along, of course, with some necessary maintenance and safety and environmental-related projects. Perfect.
spk04: Okay. Thank you very much. Thanks, Chip.
spk00: It appears that we have no further questions at this time. An encore recording of this conference call will be available in about two hours. A link to a recording of this webcast 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 late April when the company discusses its first quarter 2023 financial results. This ends the Luxfer conference call.
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