Luxfer Holdings PLC

Good morning. My name is Angela, and I will be your conference coordinator today. Welcome to the Luxfer's third quarter 2023 earnings conference call. All lines have been placed on mute. After the speaker's remarks, we will hold a question and answer session. Now I will turn the call over to Kevin Grant, Vice President of Investor Relations and Business Development at Luxfer. Kevin, please go ahead.

Thank you, Angela. And good morning, everyone. Welcome to Luxford's third quarter 2023 earnings conference call. This morning, we'll be reviewing Luxford's financial results for the third quarter ended October 1st, 2023. I'm pleased to be joined today by Andy Butcher, our chief executive officer, and Steve Webster, chief financial officer. Today's webcast is accompanied by a presentation that can be accessed at Luxford.com. Please note any reference 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 obligations 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, let me introduce Luxford CEO, Andy Butcher. Please turn to slide three. Andy, please go ahead.

Thank you, Kevin, and welcome to the Luxford team. Good morning, everyone. Thank you for joining us. We have a lot to cover on today's call. First, I'll provide a high level overview of our third quarter financial performance. On October the 11th, we announced preliminary Q3 results and the shortfall against full year guidance. I will review what drove that shortfall and the ongoing and accelerated initiatives we are executing to address the business conditions we are facing today. Steve will then discuss the quarter in more detail and provide our outlook for the fourth quarter. I'll end by providing colour on the accelerated and expanded strategic review we are undertaking, which we referenced in yesterday's release. For the third quarter, we reported sales of $97.4 million and adjusted diluted earnings per share of $0.04, in line with the preliminary results we announced. We noted that specific areas of our business were facing continued challenges with either supply chain issues or weakening demand. which we chaired on our second quarter earnings call in late July. While we lowered our full year 2023 guidance to reflect these challenges, it was not enough. The headwinds persisted and grew during the quarter, resulting in our disappointing Q3 results. On today's call, we will discuss the issues we are facing in more detail and the actions we are taking. we are tightly focused on controlling what we can as we navigate the increasingly challenging macro landscape to deliver improved results for Luxor shareholders. Beginning with revenue, the 2.8% year-over-year drop in sales was the net result of growth in the gas cylinder segment that was more than offset by a decrease in the electron segment. By end market, Our business across defence, first response and healthcare, along with transportation, grew revenues compared to last year, while general industrial saw significant reductions. Adjusted EBITDA of $6 million was down from $16.1 million in the prior year, reflecting competitive pressures and rising costs, especially in graphic arts, as well as unfavourable exchange rates, adverse volume and mix. some tough comparisons to prior year on pricing and higher legal costs. We did deliver strong cash flow, generating free cash of $8.9 million in the quarter, up by $7.6 million from the same period last year. We reduced net debt by $6.1 million to $78.4 million, resulting in a net debt to EBITDA ratio of 1.7 times. We are pressing forward with cost-cutting initiatives already commenced as well as additional programs to drive margin improvement. Let's turn to slide four for a deeper dive into the specific challenges we encountered in Q3. At a high level, the challenges we faced fell into two main categories. The first category is supply chain issues, primarily, although not exclusively, related to sourcing magnesium. With the disruption of our supply, originating from US magnesium's force majeure declaration, We and others in North America were forced to find alternative higher-priced magnesium. At this time, we have identified more competitive sources that we are approving for use in some North American products, and we are already cycling through higher-priced inputs. Until this is concluded, we incur an adverse impact on sales volumes in certain end markets, particularly in graphic arts, where higher prices have not proved sustainable. And so we work to alleviate this by focusing on products where we deliver the greatest value. The second category is a macroeconomic environment that is leading to lower demand in some of our markets. Economic slowdown and uncertainty, along with higher interest rates, tight labor conditions, and rising geopolitical volatility are impacting demand, primarily in our general industrial end markets, and are weighing on customer buying behaviors for these products. This is most evident in markets such as graphic arts, commercial magnesium powders, and industrial zirconium applications, those markets which are also susceptible to pressures from lower-cost Asian-based materials. Together, these three product categories represented approximately 87% or $10 million of the year-over-year decline in general industrial end-market sales. Turning to slide five, I will walk through the actions we are undertaking to address these challenges. Throughout 2023, we've been driving accelerated cost reduction programs, as well as cash flow and supply chain improvements. Regarding cost reductions, we are focused on ongoing structural cost savings so the benefits are sustainable. And importantly, we continue to invest in the parts of our business where we see long-term profitable growth opportunities, such as new products in Electron and new applications for alternative fuels. We have reduced, and continue to reduce, our headcounts to align our costs with the demand environment. In graphic arts and magtech, for example, this includes reducing the number of employees by over 20% year-to-date, up from the 10% reported last quarter, with similar reductions in Lux for Gas cylinders Europe. In addition to headcount changes, In graphic arts alone, we have identified $750,000 of annualised productivity savings, and we anticipate further reductions in magnesium sourcing costs next year, even before any benefits accruing once US magnesium returns to normal business operations. The consolidation of our electron powders manufacturing from three to two facilities is on track to conclude in the fourth quarter, delivering $900,000 of annualised run rate savings and allowing us to sell the vacant property in 2024. In our gas cylinders business, we are continuing to take important, proactive measures in collaboration with our customers to address high carbon fibre costs. Within alternative fuel, as we shared last quarter, we are simplifying our footprints by transferring production from Pomona to Riverside and Calgary. This is improving productivity or preserving the existing capacity and already delivering $1.1 million of ongoing annual fixed cost reductions. We plan to sublet a portion of the Pomona site in 2024. Our outlook for the alternative fuel market long term remains positive, fostered by the recent US administration's announcement that seven regional clean hydrogen hubs have now been selected to receive $7 billion from the Infrastructure Investment and Jobs Act. Finally, In addition to reducing expenses, we are managing working capital, primarily inventory and receivables. We have made good initial progress here and expect to continue driving cash flow as we work through higher cost magnesium in our inventory. At this time, I'll turn the call over to Steve to discuss our Q3 results in greater detail and updated full year 2023 outlook, after which I'll provide details on our strategic review.