Luxfer Holdings PLC

Good morning. My name is Todd, and I will be your conference operator today. Welcome to Luxfer's second quarter 2024 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 Kevin Grant, Vice President of Investor Relations and Business Development at Luxfer. Kevin, please go ahead.

Thank you, Todd, and good morning, everyone. Welcome to Luxford's second quarter 2024 earnings conference call. This morning, we'll be reviewing Luxford's financial results for the second quarter ended June 30th, 2024. I'm pleased to be joined today by Andy Butcher, our chief executive officer, and Steve Webster, our chief financial officer. Today's webcast is accompanied by a presentation that can be accessed at Luxford.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. During today's call, we'll be providing adjusted second quarter 2024 financial results that exclude graphic arts based on our strategic review decision to divest that business. Now let me introduce Luxford CEO, Andy Butcher. Please turn to slide three. Andy, please go ahead.

Thank you, Kevin, and good morning everyone. Thank you for joining us. The Luxfer team made steady progress and continued to deliver good results in the second quarter. While we faced challenges in certain markets, we achieved sequential improvement in sales, two consecutive quarters of sequential profitability, and we delivered solid cash flow throughout the first half of 2024, reflecting our success in enhancing our financial performance. Sales for the quarter came in at $91.8 million, a 10.5% increase from Q1 2024, though still down 9.6% year-over-year as we continue to see variable demand across markets. The sequential recovery in defence applications and the strength in SCBA markets is encouraging. While the overall market remains soft, we are making headway. which even adjusted EBITDA of $17.3 million, a 65% improvement from the previous quarter, and reached adjusted earnings per share of 39 cents. Solid underlying business performance was complemented by the recovery of $5.1 million of historical legal cost, with both the timing and the amount exceeding previous expectations. We delivered $8.9 million in operating cash this quarter, maintaining a healthy balance sheet with a net leverage of 1.6 times. Looking ahead, we have a steady outlook for the remainder of 2024 and expect to accelerate our momentum in 2025. The trajectory in the first half of the year positions us well to meet our full year guidance. We will continue to manage our resources carefully to both navigate ongoing challenges and capitalize on recovery trends as they develop. These operational and investment decisions are positioning Luxfer for long-term growth. Now, I'd like to give a quick update on our comprehensive strategic review with a focus on the style of the graphic arts business. Please turn to slide four. Actions taken and favourable market conditions are gradually repositioning the graphic arts segment to improve following the losses experienced in 2023 and the first quarter of 2024. The competitive process to sell this business is now reaching its detailed final stages, and we are currently working closely with a potential buyer. We are targeting completion of the sale as early as the third quarter, which will thereafter enable us to concentrate fully on our core operations and growth areas. we've made further adjustments to asset valuation to reflect the expected net proceeds from the sale. Meanwhile, we continue the important work to enhance our gas cylinders and electron segments by reducing costs and executing profitable growth opportunities driven by innovation and strategic investments. We also remain vigilant in assessing market conditions with optionality to maximise future shareholder value. This time, I'll turn the call over to Steve to discuss our second quarter results in greater detail and update on the 2024 guidance. Steve? Thanks, Andy, and good morning, everyone. I'd like to start this morning by reviewing our consolidated financial results and bridges for the second quarter 2024. Please note that any non-GAAP numbers I refer to are on an adjusted basis, excluding the graphic arts business. Let's turn to slide five. Looking at the top of the slide, while our sales of $91.8 million reflected decline from prior year, we saw a 10.5% improvement from the prior quarter. Adjusted EBITDA for the second quarter reached $17.3 million with margin at 18.8%. This represents a significant uptick from both the previous year and the last quarter. Additionally, our adjusted earnings per share rose to 39 cents from 29 cents in the prior year and 20 cents in the first quarter, highlighting our improved profitability. Stronger underlying business performance was boosted by historic legal cost recovery this quarter, contributing approximately 15 cents per share. Shifting to our balance sheet and cash, cash flow from operations was solid, generating $8.9 million, and our free cash delivered $6.2 million. We maintained strong liquidity, ending the quarter with improved net debt of $69.9 million and leverage around 1.6 times. Looking at the sales bridge, our revenue of $91.8 million compared to $101.5 million last year. Here we experienced a $9.4 million volume decrease from general industrial and defence applications, along with a $0.4 million foreign exchange headwind. We were nonetheless encouraged by the sequential growth of $8.7 million. Now turning to the profit bridge, our second quarter adjusted EBITDA was $17.3 million, up $2.9 million from the previous year. This includes a $6.4 million benefit from legal and other items and a $1.9 million benefit from price and net deflation. Our adjusted EBITDA margin improved to 18.8% from last year's 14.2% and the prior quarter's 12.6%. Please turn to slide 6 for a detailed review of Electron's second quarter financial results. Electron's second quarter of 2024 shows a strong turnaround in profitability, despite year-over-year sales and end-market headwinds. The business has improved for two consecutive quarters, with manufacturing efficiencies maintaining its margin profile. Adjusted EBITDA margin reached 29.5%, up over 1,000 basis points due to legal recovery. Without this, margin would have been approximately 17.4%, down from around 20% a year ago, but up 40 basis points sequentially, demonstrating our team's effectiveness in enhancing efficiencies and managing costs. Despite lower year-over-year sales, we saw quarter-over-quarter improvement, especially in defence applications within the defence, first response and healthcare markets. Improved demand in transportation was offset by lower general industrial costs. While overall market demand remains challenging, the business has improved from its low in the fourth quarter, and we remain positive about the long-term outlook. Now please turn to slide seven for a detailed review of the gas cylinder's second quarter financial results. Gas cylinders demonstrated continued growth in Q2 with sales of $49.8 million, up 2.7% year-over-year and 9.7% from quarter one. This growth was primarily driven by the self-contained breathing apparatus market. The margin profile is stabilizing with long-term contracts signed in Q4 of last year. Gross margin improved by 80 basis points to 16.7%, while adjusted EBITDA margins slightly decreased to 9.8%. Enhancements to cost structures and efficiencies are taking hold, with sequential adjusted EBITDA up 19.5% and margin up 80 basis points. Defence first response and healthcare sales increased year over year, driven by demand for lightweight SCBA and medical cylinders. Transportation demand slowed, particularly for hydrogen alternative fuels, and the general industrial market remains challenging, although there were some positive signs with a moderate sequential improvement this quarter. We are encouraged by the increased revenue and profitability in gas cylinders and the prospects for long-term profitable growth. Now please turn to slide eight for an update on our full year 2024 financial guidance. As a reminder, our 2024 guidance does not include the graphic arts business. We are cautious regarding the short term revenue outlook, but we have raised our financial guidance to reflect the recent recovery of historical legal costs amounting to $5.1 million. Our update now shows an increase in our projected adjusted EBITDA to be between $47 million and $50 million, with stronger adjusted diluted EPS ranging from $0.90 to $1, and higher free cash flow now anticipated to be between $24 million and $27 million. We continue to emphasize maintaining a robust balance sheet and enhancing our free cash flow, allowing for continued investment in growth opportunities, while also paying down debt and returning cash capital to shareholders. Now I'd like to turn the call back to Andy. Andy? Thanks, Steve. I now want to take some time with you highlighting the innovation that will help drive Luxfort to future sustainable growth. Please turn to slide nine. Looking ahead, our focus is on driving profitable long-term growth and preparing for future opportunities. As you know, many of our important internal tools for executing this are embedded in the Lustre business system, the principles and practices that guide us to serve our customers and deliver sustainable growth and value creation. Today, I'm highlighting three key initiatives within this, our cylinders and systems to support growth and use of CNG, the upcoming launch of our new bulk gas transportation modules and the uptake of our UGRE flameless ration heater. First, we're continuing to deploy our high-pressure tank technology with a market-leading global engine manufacturer. All necessary stock and inventory are now in place for their new CNG product launch, positioning us and our systems partner to meet future demand increases. This initiative is expected to drive significant growth and contribute positively to our results beginning early in 2025. Second, the development of our next generation transportation modules, the hydrosphere trailers and the multi-cylinder packs are also notable growth drivers for 2025. Our initiatives in clean energy have included refining the footprint of our North American cylinder operations and constructing our transportation module production facility in the UK. We expect to complete the first modules this year, and indeed last month I witnessed the commencement of our new manufacturing operations. Third, we've seen strong recent market uptake for our innovative UGRE flameless ration heater launched last year. This product allows simultaneous heating of a meal for a whole team, significantly enhancing operational efficiency. Its utility as an effective interim alternative to field kitchens has been well demonstrated, providing a substantial boost to our Magtech Solutions portfolio. This product reinforces our commitment to self-help actions that support our revenue line for the future. Innovation, exemplified by the three initiatives I just mentioned, is a critical element of the Luxor business system and is part of a cohesive plan aimed at achieving significant milestones in 2025. We are excited about the opportunities ahead of us and committed to capitalizing on them. Please turn to slide 10. We are proud of the significant progress we've made amid a challenging market landscape. We have achieved sequential improvements in both sales and profitability, demonstrating our resilience and strategic execution and reinforcing my confidence in our long-term success. We continue to emphasize a strong balance sheet and generating free cash flow, supporting our growth investments and returning capital to shareholders. We've seen consistent margin improvements from our focus on streamlining processes and optimizing our operations. We will continue to enhance productivity and control costs effectively. Our clean energy strategies including advancements in CNG and bulk gas transportation, are positioning the business for notable growth in 2025 and beyond. The sale of the graphic arts business is progressing smoothly and on track to our expectations, allowing us to focus on core growth areas. All these accomplishments underscore our commitment to driving value and enhancing performance. We remain focused on delivering results for the remainder of 2024, with a clear path to achieving our four-year guidance. Our strategic focus remains on leveraging our materials engineering expertise, fostering innovation, and delivering sustainable long-term growth. With that, I'd like to turn the call back to the operator for the Q&A session. Todd, please go ahead.