Luxfer Holdings PLC

Good morning. My name is Madison, and I will be your conference operator today. Welcome to Luxfer's first quarter 2025 earnings conference call. All lines have been placed on mute. After the speakers 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, Madison, and good morning, everyone. Welcome to Luxfer's first quarter 2025 earnings conference call. This morning, we'll be reviewing Luxfer's financial results for the first quarter ended March 31, 2025. 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 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. During today's call, we'll be providing adjusted first quarter 2025 financial results, excluding the Graphics Arts business and 2024 legal recoveries. Now, let me introduce Luxfer's CEO, Andy Butcher. Please turn to slide three. Andy, please go ahead.

Thank you, Kevin, and good morning, everyone. Thank you for joining us. We are very pleased with our first quarter performance. Our team delivered adjusted earnings per share of 23 cents, up from 20 cents a year ago, and maintained net debt at approximately $42 million, or 0.7 times leverage. Sales revenues grew significantly, led by Electron, and driven especially by off-cycle demand in flameless rationed heaters, as well as our group ration UGREs, reflecting higher 2025 demand from our defense applications, as well as commercial customers replenishing inventories. We also saw a continuation of the rebound in defense flares and aerospace, and our overall order books as we left the quarter were elevated by 12%. We'll dive deeper into the encouraging UGRE outlook later as a flagship example of our Luxfer business system in action. The planned divestiture of our graphic arts business is nearing completion and remains on track to close by the middle of the year, which will enable us to sharpen our focus on higher margin growth opportunities. I'm also pleased to announce that order has been secured for our first bulk gas transportation system in Europe, a milestone that underscores Luxfer's expertise in large-scale compressed gas handling as we expand our international gas solutions portfolio. Turning to tariffs, through a variety of proactive and reactive steps, we have effectively avoided or neutralized incremental direct duty costs as of now. This insulation from recent tariff actions reflects deliberate, forward-looking activities across the business. Based on work of the past several years, there are fully approved reciprocal tariff exemptions covering our electron alloys and most of our zirconium inputs. Nearly all cylinder trade within North America benefits from USMCA protections, and we have additionally used duty drawback programs and local sourcing to limit cross-border exposure. Combined with some minor price changes where necessary, I'm pleased to say that these strategies have positioned us to minimize direct reciprocal tariff impacts today. That said, we remain attentive to evolving macro risks. We are very closely monitoring ongoing developments around rare earth supply channels from China and broader trade policy dynamics. Furthermore, should new duties emerge, we are prepared to adjust our sourcing, pricing and operational strategies as needed, and our heavy weighting in defense, first response and aerospace continues to position us well against any broader economic slowdown. Overall, Q1 demonstrates that Luxfer can execute effectively in a dynamic environment. With a strengthened backlog, we remain encouraged by our internal performance and the near-term outlook. With that, I'll hand the call over to Steve, who will provide details of our financials and share our 2025 guidance.

Steve? Thanks, Andy, and good morning, everyone. Let's turn to slide four for a review of our consolidated financial results. In the first quarter, sales were $90.5 million, up .9% -over-year, on solid end-market demand. Adjusted EBITDA rose .7% to $11.3 million, delivering a .5% margin. We generated $5.1 million of cash from operations, a $1.5 million increase, and maintained a low net debt of $41.9 million. On the right, our sales bridge shows that volume and mix contributed $7.2 million, driven by off-cycle defense pull-ins for MREs and Flares, plus an improving aerospace backlog. Pricing added $0.5 million, reflecting SCDA escalators and selective customer increases, partially offset by repricing in Electron due to certain lower input costs. FX was a modest $0.3 million headwind. For our adjusted EBITDA walk, net deflation added $0.6 million. Volume and mix and pricing contributed $3.7 million and $0.5 million, respectively. While adverse factors of $3.7 million largely reflect $1.7 million of transitional production costs and $1.2 million of elevated logistics and ongoing investments. For a full breakdown, please see the detailed waterfall in the appendix on slide 12. Now let's turn to slide 5 for a detailed review of Electron's first quarter financial performance. Our Electron segment harnesses proprietary magnesium and zirconium platforms in markets where higher performance is critical. We serve customers who demand deep technical expertise, whether that's ultra-lightweight alloys that extend aircraft range and cut fuel burn, countermeasure flares and self-heating MRE powders that protect and sustain personnel in extreme conditions, or zirconium-based catalysts and oxides that drive precision in advanced manufacturing, clean energy solutions and critical health care applications. By focusing on high barrier defense and aerospace driven end markets, Electron commands premium pricing and high margins, powering sustained growth as global demand for safety, reliability and performance continues to climb. In the first quarter, Electron sales rose to $49.4 million, up 31% from $37.7 million a year ago. Adjusted EBITDA increased to $8.7 million and our EBITDA margin expanded to 17.6%, a 120 basis point improvement versus the prior year. Growth was broad-based across our core end markets. Defense, first response and health care led the way up 76%. Customers continue to restock flameless ration heaters and meals ready to eat products, and demand for our related UGRE product is still increasing. We also saw a meaningful pickup of demand for both our magnesium aerospace alloys and magnesium powders for countermeasure flares, as customer manning and production issues began to ease across both market sectors. Alloys lifted our transportation revenues by approximately 11%, despite some softness in automotive catalysis. In specialty industrial, market conditions resulted in flat to modest growth of around 1%. Adjusted EBITDA margin expansion reflects the impact of higher volumes relative to fixed costs, as well as a favorable shift towards higher value defense programs. Furthermore, there is ongoing payoff from the site consolidation and lean operational efficiencies we embedded under our Lux for Business system last year, which will continue to deliver cost savings and margin resilience. Overall, Electron's performance underscores the power of focused execution and targeted innovation. With that, let's turn to slide 6 for our gas cylinders results. Lux for gas cylinders is the benchmark for mission-critical pressure vessels, anchored by SCBA market leadership and long-standing partnership with Bluechip OEMs. Our lightweight rugged cylinders protect fire, emergency and hazardous environment teams, while our high-performance, high-strength cylinders enable life support and operations in aerospace and space exploration applications. We also serve specialty industrial, medical and alternative fuel markets with precision engineered solutions. Backed by proprietary processes and rigorous qualifications, this segment commands premium pricing and delivers resilient margins in high barrier markets. In the first quarter, gas cylinders revenue was $41.1 million, down 9% from $45.4 million in Q1 2024, and adjusted EBITDA came in at $2.6 million, reflecting a .3% margin versus 9% last year. This performance was largely in line with our expectations. We saw softer demand in alternative fuel cylinders, with the heavy-duty truck market still subdued. Aerospace and especially space exploration demand is robust, although overall transportation sales declined about 23% -over-year. However, despite the anticipated softness in alternative fuels, the strong aerospace volumes and the order for our first bulk gas transportation module will open new opportunities for future growth. Although down 7%, our defence first response and healthcare business held up relatively well, with steady orders for SCBA and an improving outlook. Specialty industrial posted a notable 25% increase driven by electronic and calibration gas applications. Margin compression resulted from the lower volumes, although pricing actions helped offset some headwinds. Importantly, the efficiency initiatives we put in place last year are now starting to stabilise margins, and we expect these permanent measures to support stronger second half. In summary, while gas cylinders faced headwinds in certain end markets, our core first responder, aerospace and healthcare-related cylinders remained resilient, and our cost and efficiency focus will continue to drive improvements. Now please turn to slide 7 for an update on our full year 2025 financial guidance. I'd like to reinforce two key themes from Andy's opening comments, our tariff resilience and the strength of our backlog across defence first response and aerospace applications. Combined with our diversified portfolio, these factors give us some confidence despite the uncertain macroeconomic outlook. Accordingly, we are reaffirming our full year 2025 guidance, unchanged from what we communicated in February, with expectations for flat revenue growth. We continue to anticipate adjusted diluted earnings per share in the range of 95 cents to $1.05, and adjusted EBITDA between $48 million and $52 million, and free cash flow generation of $20 million to $25 million for the full year. This outlook reflects our confidence in the aggregate underlying demand from our end markets, combined with disciplined cost management, prudent price actions, and tight working capital controls. That said, foreign exchange does remain a key sensitivity, and indeed we have seen significant volatility in the last few weeks. For our business, a five cent move in the dollar versus sterling can shift our full year earnings by around $1 million. Although, we continue to hedge selectively to mitigate some of that risk. On capital deployment, we'll maintain our routine share repurchase program, with board authorisation for up to $10 million of additional opportunistic buybacks. We're also evaluating further simplification and cost reduction initiatives to drive improved efficiencies across our operations. We remain confident that our Fortress balance sheet and diversified end market exposure will enable us to navigate any remaining headwinds and deliver on our projections. Now I'd like to pass the call back to Andy. Thank you Steve.

Please turn to slide eight. Our Luxfer business system gives us a structured way to innovate, drive efficiency and stay agile, always focused on meeting customer needs and delivering profitable growth. A prime example is our unitised group Russians UGRE platform, where lean principles and direct user feedback have produced a highly portable, low touch module, crafted with environmentally friendly materials, perfectly suited for today's dynamic field environments. Military teams operating in austere or rapidly changing settings have found this additional option vital. Not only in deployments without dedicated kitchen staff, but also during training exercises where permanent mess facilities are not available. By minimising manpower requirements and set up complexity, UGRE enables sustained operations anywhere. Sales of UGRE reached a record $4.6 million in 2024 and our backlog for this year indicates demand will more than double that level in 2025. I'm especially proud to share that the US military is tendering UGRE modules for its war stock under a vendor managed inventory programme. This underscores our confidence in UGRE as a strategic complement to traditional single person meals ready to eat and highlights our ability to deliver and replenish these platforms seamlessly. These advancements, portability, low touch operation and military validated inventory support exemplify how the Luxfer business system embeds continuous customer driven innovation into everything we do. Now please turn to slide 9 to review the highlights and achievements of the first quarter. We delivered solid operational execution in Q1, posting adjusted earnings per share of 23 cents and generating $5.1 million of cash from operations, turning a typically working capital intensive first quarter into a net inflow. The sale of our graphic arts business remains on track to close in the first half of 2025, freeing up capital and talents to fuel higher margin growth opportunities. Margin and cash discipline remain at the core of our model. Permanent process improvements, disciplines working capital management and careful pricing decisions have not only widened margins but also maintained low levels of net debt. Our targeted innovation continues to drive results. The lean driven redesign of UGRE and standout MRE performance showcase how the Luxfer business system accelerates customer focused solutions in one of our important defence oriented product lines. Finally, our proactive approach to tariff risk from leveraging critical material exclusions and USMCA coverage to long term supply agreements, inventory buffers and dynamic pricing positions us to weather tariff disruptions with minimal impact. The results we have shared this morning reflect our long term focus, executing today while investing in tomorrow. Since our October 2023 strategic review, we've acted on key opportunities, divesting graphic arts on track for H1 2025 and driving cost, innovation and margin gains in both electron and gas cylinders to sharpen our portfolio and boost profitability. We also remain attentive in assessing market conditions to maximise future shareholder value. Thank you to our global associates for their dedication and thanks to all of you for your continued interest in Luxfer. I will now turn the call back to the operator for questions. Madison, please go ahead.

And at this time if you would like to ask a question please press the star and 1 on your telephone keypad. 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. And we will take our first question from Steve Farazzani with Sadodi. Please go ahead. Your line is open.

Morning Andy, morning Steve. Appreciate all the detail on the call. Certainly strong start to the year outperformed our expectations. I don't know if it outperformed your internal expectations. But just trying to find out anything special in the quarter. Were there any pull forwards and does this set you up? Because you didn't raise guidance. Does this set you up for a better year?

Thanks Steve and good morning. Yes we were pleased with the Q1 results. I think the thing we were most pleased about was the strength in the defence market. Q1 was particularly encouraging in that respect. The sales of the flameless ration heaters were good and should remain elevated. UGRE range ramping up, that's helpful. Magnesium powders for flares, magnesium alloys for defence. Those are encouraging especially flares. So overall we're very positive on the defence sector for 2025. Of course we're conscious about monitoring macroeconomic changes closely. Thinking about future tariffs, exchange rates, supply of rare earths. But we like where we sit at the end of Q1 and that's why we're reaffirming our guidance.

I was particularly surprised by, and I know it's off a small base, but the strength you saw in specialty industrials in the gas cylinder side. Anything driving that?

Yes, I think there's some long term trends in speciality industrial gas cylinders. Our product there is targeted on profitable niches, high value niches where customers are looking for special high purity gases to be stored in cylinders with inert surfaces. So these aren't routine industrial gas products, these are specialty items. They find their way into gases for semiconductors, for other electronics applications, for calibration gases. And there are a number of reports suggesting that long term the need for those gases will increase. So yes, that's encouraging.

Great. If I can ask about uses of cash, obviously your balance sheet now is in such virtually pristine shape. It sounded Steve like you had mentioned that you would increase the buyback by 10 million for opportunistic purchases. Can you talk about capital allocation in this environment where your capbacks is so low? How do you think about buybacks and also if you can touch on M&A potential?

Yeah, I mean first of all I'll cover the buyback. So what I said is that we're continuing our standard buyback program which is effectively an anti-dilution program for management incentives. We have authorization of 10 million dollars from the board to do opportunistic buybacks. We have not commenced that yet but we're clearly looking at that. That's an interesting area for us, particularly if the stock price remains where it is. In terms of capex, yeah, I mean we only spent around one million dollars in quarter one. That said, we will be expecting to spend more this year than we have in previous years. So the guidance says 12 to 15 million dollars of capex. We're still looking at, so we've maintained that. That's the same as it was at the end of quarter four. So we are looking for a ramp up in capex this year. There's some good opportunities for growth capex as well as our standard maintenance capex. And on M&A, yeah, we always remain open minded. We have a pipeline of opportunities that we constantly review with our business units. So nothing imminent at the moment but it is something we're always looking at.

Great. Can I just ask about, I know some of your defense business, some of the higher margin like MREs can be lumpy, but you've had almost three consecutive quarters of very strong numbers there. Is that because of the UGRE launch or is there something else driving that and how sustainable is it?

It's two things, Steve. It's the UGRE which continues to ramp up as you've highlighted, but it's also some elevated levels of replenishments that's going on most of this year, probably at least through quarter three in military stocking. So there's some way to go on that as well as stronger sales in the flares market. So yes, it does look positive at the moment.

Great. Great start to the year, guys. Thanks, Andy. Thanks, Steve.

Thanks, Steve.

Thank you. There are no more questions in queue. At this time, I'll turn the call over to CEO Andy Butcher for final remarks.

Thank you. As we conclude, I want to remind you what makes Luxfer a compelling investment. In Q1, we not only delivered strong first quarter cash flow, but we also expanded margins and generated top line growth in our core defense and aerospace end markets. Our lean driven Luxfer business system has permanently embedded cost and process improvements, while targeted innovations such as UGRE and the recently launched bulk gas transportation module demonstrate our ability to respond to customer needs. We have a solid balance sheet, low leverage and recurring demand in high barrier businesses. And with board authorized share repurchases, disciplined capital allocation, and a robust backlog underpinning our outlook, we are well positioned to deliver sustainable long term value. Thank you to our global team for their dedication and thank you all for your support. We look forward to updating you next quarter.

Thank you. This concludes Luxfer's Q1 2025 earnings call. A 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 .luxfer.com.