Half Year 2022 Luxfer Holdings PLC Earnings Call
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Good morning, My name is Katie and I will be your conference operator today welcome to look first second 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 conference over to Mike Gaiden, Vice President of Investor Relations and business development for Lux for Mike. Please go ahead.
Thank you Katie and welcome everyone to <unk> second quarter 2022 earnings call with.
With me today is Andy <unk>, Chief Executive Officer, and Steve Webster, <unk>, Chief Financial Officer.
On today's call, we will provide details of our second 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 <unk> Dot 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.
Following steves remarks, Andy will provide additional details about <unk> growth outlook before Q&A Andy.
Andy Please go ahead.
Thank you, Mike and welcome everyone. Please turn to slide three.
I am pleased to share with you details of our second quarter performance, which resulted in sequentially improved revenues and profits.
I want to start.
By expressing my thanks to the entire Luxor team, who once again work through a challenging supply chain backdrop to deliver for our customers.
Our team's focus and dedication helps build on the momentum seen in our Q1 results.
On this slide I want to highlight three key messages.
Firstly regarding our financial performance, we delivered more than 10% year over year sales growth in the second quarter, continuing the double digit percentage gains also realized in Q1.
Our Q2 top line expansion was driven by our ongoing success in passing through cost inflation as well as increased volumes.
Q2, adjusted diluted earnings per share of 36%.
Steadily advanced our progress towards our previously outlined guidance for the full year.
Our Elektron segment led our overall performance with increased profit and sales strength, notably in many areas.
We are also encouraged by gas cylinder sequential improvements in sales and profitability as well as the order inflow for alternative fuel systems.
Our capital position remains solid with a net debt to EBITDA ratio of one two times helped by a return to free cash flow generation.
Secondly, we continue to see healthy levels of demand in Q2 <unk>.
Revenue in a broad range of our major end market categories increased versus prior year.
The more than 25% revenue growth in our transportation market and 14% growth in industrial end markets was particularly pleasing.
We also continued to implement actions to offset the inflation of our input costs.
Although our supply chain has improved from year end as expected we are still dealing with some areas of availability and logistics challenges, which continues to inhibit our ability to grow volumes further.
Thirdly, our solid first half performance and sound backlog position us to achieve our 2022 adjusted diluted EPS guidance of $1 35 to $1 50.
Moreover, our year to date results and broader outlook reinforce our confidence in achieving our longer term 2025, EPS goal of $2 or more.
Turning to slide four I would like to provide more details on current business conditions.
During the second quarter, we sustained a healthy pace of orders.
<unk>, our backlog and reflecting broad based customer customer demand across our business units.
Performance was strong in both our transportation and industrial end user segments.
Although defense and first response was lower due to a slower demand for Flameless Russian heaters.
We were pleased by strength in aerospace and automotive markets as well as with commercial magnesium revenues.
In alternative fuels, we are encouraged by increasing hydrogen systems orders in Europe .
Knowing the success of early approach to type deliveries. This.
This development further reinforces our positive long term view of the growth opportunities in hydrogen.
Supply chain conditions remain uneven.
The rate of raw material price increases has reduced bringing some improved near term visibility on cost which is helpful.
At the same time, we continue to grapple with recurring material availability constraints long supplier lead times and logistical bottlenecks. These.
These same conditions also continued to impact some of the key industry customers. We serve so for example, some parts of the automotive industry remain constrained by component shortages, and we see AD hoc delays in other sectors as well.
The force majeure condition remains ongoing at U S magnesium and the labor market remains tight.
Given the supply conditions in the backdrop of an evolving macro environment monitoring market developments and close coordination and communication with customers and suppliers remain top priorities.
We continue to review, both macroeconomic and local end market indicators amid the sustained demand we see for our portfolio.
While our demand remains relatively strong I want to take a brief moments to discuss how we expect our business to perform if macroeconomic conditions slow.
From a revenue perspective.
Balanced portfolio holds many diversification benefits.
Substantial portions of our business hold reduced direct tied to cyclical economic influences, including defense first response and health care.
Further underlying demand for a number of our products comes from recurring replacement cycles, while other portions of our business. For example, alternative fuels are driven by secular tailwind, including regulatory legislative and social mandates.
From a cost perspective, we are undoubtedly well positioned today, thanks to a simplified footprint with lower operating costs and flexibility to adjust capacity.
We also sit well positioned from a balance sheet perspective, with low leverage levels and high available liquidity and ability to adjust capital expenditure levels as warranted.
Overall, we believe we are appropriately positioned to deal with evolving macro conditions.
Given the current strong demand, though we remain highly focused on successful execution.
Having a customer first discipline alongside a highly engineered product lines provides us a competitive advantage and allows us to offer responsive lead times will passing through material inflation costs.
Our manufacturing plants are flexible and our footprint allows us to balance supply from different facilities.
And our ability to execute has been assisted by our long term relationships with many of our suppliers and the targeted inventory that we put in place earlier in the year.
All of these factors gives us optimism in <unk> ability to meet the needs of our customers and advanced towards our financial objectives.
Now, let me turn the call over to Steve for details on our second quarter financial performance.
Thanks, Andy I'll begin on slide five for a summary of our performance by end market.
As a reminder, we classify our sales into three key end markets Defense first response and health care.
Transportation, which includes alternative fuel aerospace and automotive and general industrial.
On this slide we have included quarterly and year to date numbers for 2022 as well as the two preceding full financial years.
The commentary on the slide references the current quarter only.
In the defense first response and health care end markets sales decreased by four 8% largely due to lower replenishment orders for Flameless ration heaters, which we attribute to lower levels of U S troops deployed in the field a trend we expect to continue throughout quarter three.
However, similar to quarter, one and quarter two we realized strong demand for magnesium powders used in military flat, while first response and health care revenues remained solid.
Quarterly sales and transportation expanded 26, 1% following quarter, one to 11, 6% increase we continue to benefit from the recovery in demand for aerospace products, including our magnesium alloys used in helicopter gearboxes as well as cylinders used in the deployment of aircraft escape slides and delivery of cabin oxygen.
Demand for automotive products also performed well, especially in magnesium pellet for alloy wheels, as well as our auto catalysis lines.
And while alternative fuel sales were lower in the quarter. We are encouraged by the acceleration of hydrogen systems orders as Andy mentioned.
Which supports our optimism for this exciting future growth opportunity.
Sales in the general industrial end market increased 13, 8% for the quarter on the heels of quarter 128, 4% increase.
Electronic game drove this performance with sales of nearly all commercial categories demonstrating growth amid our actions to pass through rising cost inflation.
Commercial magnesium powders graphic arts and zirconium oxides, let this broad based strength.
Overall, we are encouraged by quarter, two revenue performance, which enabled us to further advance toward our 2022 financial targets.
Now please turn to slide six for a summary of our second quarter results.
Second quarter sales of $109 $5 million increased $10 5 million or 10, 6% from the prior year.
Our quarterly revenue revenue benefited from $13 million of price actions taken to address input cost increases and enjoying $1 $3 million of volume growth.
We experienced foreign exchange headwinds of $3 8 million, meaning sales revenues increased by 15% excluding FX.
Consolidated adjusted EBITDA of $16 9 million for the quarter decreased <unk> 4 million or two 3% from the prior year.
So we enacted additional price actions as anticipated this effort did not fully offset the aggregate impact of cost inflation and other supply chain disruptions.
As we implement further price adjustments in the second half we remain confident in our ability to pass through cost inflation to our customers. We're not limited in the near term by contract.
Overall, we are pleased with our performance in quarter, two amid dynamic operating conditions.
Let's review our segment results on slide seven.
Elektron revenues of $63 $4 million rose, 28% from the prior year driven by our timely efforts to pass through input cost inflation as well as strong demand in our aerospace automotive and industrial end markets.
Our Elektron EBITDA was $13 2 million increased by 10.0% helped by cost pass through and modest foreign exchange gains.
Gas cylinder segment sales of $46 $1 million decreased nominally zero point $4 million or <unk>, 9% from the prior year quarter.
Excluding the $2 million adverse foreign exchange impact underlying revenues increased by $1 6 million or three 6%.
EBITDA of $3 7 million decline from the prior year's $5 3 million.
Hampered by input cost inflation and near term contractual limitations on pass throughs.
Given the sequential financial improvement and a continued healthy order backlog, we remain confident in the outlook for this segment.
Now, let's turn to our key balance sheet and cash flow metrics on slide eight.
<unk> capital position continues to serve as one of our core strengths.
Our balance sheet health has enabled us to better support our customers amid some ongoing challenges to the broader supply chain.
We delivered <unk> 6 million and free cash flow for the quarter, improving from the $10 3 million outflows seen in quarter one.
While our working capital at 26, 6% of annualized sales exceeds our 21% to 23% target. We believe are short term investments and inventory serves as a key differentiator in our long term customer first strategy.
As in quarter, one our accelerating sales volume within the quarter further contributed to the elevated working capital position at period end.
We remain committed to our 21% to 23% working capital targets and expect progress back toward this level of supply chain conditions normalize.
With net debt of $76 million, our net debt to EBITDA ratio measured a modest one two times and I am pleased to report that on a trailing 12 month basis, we delivered 14, 5% ROIC based on adjusted earnings.
We expect this balance sheet strength to serve us well in both the near and long term.
Let's now review, our current 2022 financial guidance on slide nine.
With our quarter two performance in line with expectations, we remain on track to deliver adjusted diluted EPS of $1 35 to $1 50 this year.
We continue to expect revenue growth of 12% to 20% to underpin this earnings forecast we.
We are encouraged by strong demand levels backed up by healthy order flow across most of our product lines, while carefully monitoring the broader macro economy.
At the same time, we anticipate that some near term softness affecting defense, including Flameless ration heaters will likely cause our second half earnings to be more weighted to the fourth quarter.
Also on foreign exchange the strength of the U S. Dollar represents a translation headwind to U K sales at a rate below $1 30 to the pound.
At the profit level. However, a weak pound is generally favorable to our UK businesses since the sizeable portion of sales are invoiced in currencies other than Sterling complementing our lower operating cost base when translated into dollars.
As mentioned earlier, we continue to address the challenges brought by cost inflation with our efforts to pass through these increases to customers.
Our work in this area will be further enhanced when some of our existing contract terms enable increased cost pass through at the start of next year.
While these same supply chain pressures have driven our working capital levels higher we remain focused on free cash flow conversion and expect significant improvements in the second half.
But recognize that a 100% free cash flow conversion target may be pressured this year.
That said as a reminder, we will benefit from no anticipated pension contribution in 2022 compared to $18 $2 million contribution in 2021, we.
We also expect to make the remaining cash payment later this year associated with the French manufacturing facility that we closed in 2019, after which we do not anticipate further significant restructuring outlays.
Next I would like to review our capital allocation priorities on slide 10.
We continue to emphasize our balanced approach to redeployment of free cash flow back into our business.
First and foremost we are reinvesting in our organic growth opportunities such as hydrogen systems and syconium applications.
We view this activity as both the highest return lowest risk of our cash flow.
We will also continue to return a portion of our free cash flow to shareholders earlier. This year, we increased our quarterly dividend by 4% to <unk> 13 per share.
During the second quarter, we took advantage of the broader weakness in the equity markets to repurchase $2 $2 million in shares accelerating from $1 5 million in quarter, one and adding to last year's $6 $4 million of repurchases.
Over the medium term, we aim to supplement these two areas of activity with select bolt on M&A opportunities that add to our growth and return objectives to create additional shareholder value.
We are evaluating our acquisition candidate pipeline for opportunities to intelligently complements our organic organic growth strategy, but doing so cautiously in the current environment.
In summary, we expect to generate significant free cash flow over the next several years, which we will invest in line with this balanced approach to capital deployment.
And now I'd like to turn the call back over to Andy to talk about our longer term objectives.
Thank you Steve.
Before concluding our prepared comments I would like to update you on the developments of our growth strategy as shown on slide 11.
Over the last two months, Steve and I have spent a significant amount of time evaluating our business with the rest of the luxury executive leadership team.
Together with visited our major business units in both North America and Europe .
We have met with a significant number of investors and potential investors.
We have engaged with our customers.
And we have reviewed growth strategies with each of our local management teams.
Most importantly, we have listened to our customers to our employees to our shareholders and other stakeholders.
Ted we leaned in are small questions and dug deeper.
A number of key areas of business strength were identified from this dialogue.
We are encouraged by our technical expertise in high performance materials.
We are excited about the range of product developments underway.
We are pleased to see the flexibility of our global operations.
We've been inspired by the enthusiasm of our employees and their commitment to our customers.
And our whole leadership team is optimistic as we embraced the challenge to unlock shareholder value through delivering profitable growth.
So now we are formulating a concentrated approach to delivering that profitable growth.
Firstly, we are focusing on opportunities, where we enjoy tail winds in clean energy and light weighting and the safety health and technology.
Secondly, we are enhancing our internal operating model to support our growth strategy. This model is based on six critical processes strategy deployment lean operations.
Development commercial excellence sustainability and people excellence.
And thirdly all of these efforts are underpinned by a strong focus on investing in our people. We firmly believe that our human capital will prove critical to our success today and in the years ahead.
And now I would like to conclude by summarizing our strong positioning for value creation on slide 12.
<unk> mission is to help to create a safe clean and energy efficient world.
We are a global industrial company with market leading products.
We work with high technology materials and target value added niche applications.
We participate in attractive end markets and we are aligned with the secular growth in clean energy and light weighting and in safety health and technology.
We deliver leading returns on capital with a strong balance sheet and consistent cash conversion.
We realized healthy margins and take a balanced approach to capital allocation.
We are primed for growth with a broad pipeline of new products.
We have many compelling commercial opportunities and we are committed to unlocking shareholder value.
There is a bright future ahead of us.
To conclude our prepared comments.
We are pleased with the Q2 results that we've shared with you today.
We are optimistic about the new opportunities for 2023 and beyond and.
And we look forward to providing further updates as we progress.
Now I would like to turn the call over to the operator to begin the Q&A session.
Casey. Please go ahead.
Thank you Sir at this time, if you would like to ask a question. Please press star one on your Touchtone. Following you may remove yourself from the queue at any time by pressing the pound key.
Once again that is star one to ask a question we'll pause.
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.
Hey, good morning, guys. Thanks for taking a couple of questions.
Great.
Good morning, and maybe start with kind of order growth versus backlog growth, how would you characterize kind of the.
The trend in each deal I know you don't give specific numbers, but can you talk maybe you had order growth year over year backlog growth year over year.
Yes, the order.
Order intake was strong during during quarter two.
We now hold a higher order backlog than we did at the end of quarter, one and indeed higher than at the same time last year, even allowing for.
The increase in prices, we've seen higher volumes as well. So we're so we're pleased with us with that.
We have we do have a slight weakness in the flame instruction heaters as we as we mentioned where demand is now weighted towards quarter, four and that's a little unhelpful.
As a result, I think we expect our earnings Chris to be weighted towards quarter four as we indicated and at this point I would think Q3 EPS could look more like Q1, EPS, but of course, we are maintaining our full year guidance.
Overall, we're pleased with the order strength in a wide range of areas magnesium plate alloy wheels medical cylinders.
The initial zero supply of hydrogen vehicle cylinders for trucks.
While we watch the global macroeconomic backdrop carefully and we like the demand picture, we have been in many areas of the business.
Got it I appreciate that.
So the revenue growth guidance, staying 16% I think mid point.
Volume was up slightly Q2 down.
And the first half overall can you maybe just talk about that that volume assumption that's embedded into the revenue growth guide.
Yes, so it's a 12% to 20%.
Volume volume.
12 months to 20% revenue growth.
More of a more of that's going to come from the changes in price than that in volume, but we are going to see some some stronger volumes for the full year. So we're pleased about that now I think that volume I think that volume growth would be yet will be higher we not wrestling with some of those supply chain.
Struggles.
They are improved since what we were saying at the start of the year of the year.
But.
<unk> still hampering our.
Our execution in <unk> and a number of areas and so so we look for that to improve further as we as we run through the year and into 2023.
Got it and last one for me, maybe you can talk a little bit more about the cost pass throughs on the gas cylinders.
And the contractual arrangements that have kept you from from catching up.
As quickly as you would have liked it.
What's the timing there and kind of what are some of the mechanisms there on the contractual arrangements.
Yeah, Let me talk broadly to add to that we are passing through our material cost increases to our customers, whereas rollout by contracts and agreements of a.
Of course.
And I would like to say that while we're seeing some changes in demand associated with that pricing and that's a relatively muted level so far.
Which I think speaks well to our differentiated niche application products now as you say in some cases, there are timing elements in our contracts that determine the rate of that car cost pass through.
And that's most notably notable yes, with our contractual agreements in cylinders.
And with automotive catalysts.
So youll have seen that.
88% of our cost inflation and quarter two is being recovered so we're encouraged by that but.
But not satisfied with it. So there are further cost pass throughs planted electron in the second half of this this year and there is more work on material cost pass through Ada in cylinders as contracts unwind some of that goes through in the second half of 2022, but especially takes effect.
As we enter 2023, Chris.
Got it okay, so a little bit improvement there in late 'twenty, two and more than 23.
Helpful. I will leave it there I appreciate it guys.
Thank you. Our next question will come from Phil Gibbs with Keybanc capital. Your line is now open.
Hey, good morning Monica.
Well in terms of the the second half you gave us some pretty good color generally there is the idea that the third quarter is going to have a weak mix within elektron defense business.
In terms of both the MRE and flares.
Essentially you think some of that begins to come back from a timing perspective in Q4.
Yes. So we've got so we got quite good order strength as we go into.
Quarter, three and quarter four with summer with some good momentum we think the older Bank solidly ahead of.
Last year, but yes, a significant portion of our Flameless Russian heaters, where we do have orders is weighted towards towards quarter, four and to a certain extent that's true of some of the chemical detection kits as well, so thats thats unhelpful, but copper concentrating on electrical in particular.
The magnesium.
To engraving plate looks at looks strong we're seeing increasing momentum for that as we go towards the end of Q3 and into Q Q4, we've got stronger demand for La <unk>.
And <unk> remained steady as well so so that's the breakout of the mix in elektron.
Okay terrific there.
And then the.
The management team effectively.
Turned over.
Over the course of the last several months.
And you outlined a number of things are objectives that you have for the company.
Looking looking ahead.
Is this consistent with the prior.
Management style or objectives or have there been alterations to that view.
That's a great question. Thank you for that Phil This is very much.
Evolution not a revolution a continue of the of the game plan that the company has been following for some years completing the execution of our work on simplification and now moving into a into a growth growth phase, so Steve and myself with <unk> with the company for a significant length.
A time are continuing to drive forward with that perhaps with a with a higher.
Emphasis on.
Our growth at the at the moment, a renewed commitment to strengthening our internal operating system, but I think you should see this desire is a continuation.
And reinvigoration.
Reinvigoration of our.
Our long term growth strategy.
Thank you and then just lastly.
Maybe reiterating what you said on pension contributions.
The timing and size of cash restructuring payments.
That may come this year. Thank you, yes, Phil I'll take that yes.
Pension contributions I think if you recall on the U K, we made a special one off contribution last year, so that was really due.
Driving the total contribution up to the $18 million or so I've said in the remarks. So the agreement that we have with our trustees in the UK is that it's unlikely we will have to make any further payments over the next three years and of course that pension plan in the UK is now in a surplus position has historically been in deficit. So.
We're pretty comfortable on that we've got a much smaller cloud in the U S. DB plan, which we are in the process of <unk>.
Basically buying out that liability.
We think that should happen probably in quarter. One of next year. So we're not anticipating cash outlay this year.
That would be of the region of maybe $3 million to $5 million I think in quarter. One of next year to get that completely off our books. So I think really positive there on the on the pension in terms of the absence of cash.
Structuring, yes, so I've said in the remarks that we'd be should be done with fronts. This year, we did spend $6 million to $7 million in quarter. One on France. There has been a small amount of restructuring cash thinking quarter to roundabout 500 $600000.
We think the final payment for France should go through quarter.
Quarter three quarter four this year in total that would be no movement around $3 million. So.
Total cash for restructuring this year I think as we've said previously will be round about $10 million.
Thank you.
Thank you once again, if you would like to ask a question. Please press star one on your Touchtone phone.
Our next question will come from Chip Moore with F. Hutton. Your line is now open.
Good morning. Thanks.
Just wanted to follow up on supply chain and raw material.
Availability I guess.
<unk> obviously.
We're well aware of.
The issues, there, but curious on carbon fiber and <unk> and some of the other key inputs.
Yes, thanks, Thanks chip good morning.
<unk> supply chain improved from from year end, certainly continue to see to see some challenges so very much an area demands our attention.
Our magnesium as you say no significant update from the from the last quarter on the on carbon fiber and indeed on other fibers pricing remains elevated.
Supply is constrained there was some specialist fibers, such as aramid fibers, which are which are highly constrained.
That gets used on our on our slides and oxygen deployment in aerospace, but overall on carbon fiber, we're getting decent availability for our from our long term partners.
And we have put in place some some targeted inventory.
On sand.
Coming mainly out of Richards Bay in South Africa. The mine reopened of course as we reported in last quarter's call, which is which is positive now the nearby ports. There is facing significant bottlenecks at the moment, which is due to the large amount of material that is now awaiting expo on the other side of that of the outage.
So we are working to not only receive shipments from Richard Bye Bye.
But also to qualify and utilize alternative zircon sand suppliers elsewhere in Africa as well as in Asia. So so.
So that will ensure greater supply robustness.
Over the medium to long term and ensure we can meet our growing demand expectations and until those are in place.
Concern supply does remain an area of elevated concern. So so overall improved from year end.
But still a continued challenge chip.
Yes. That's helpful is there a sense of.
How much sales might have been restrained this quarter or any stock outs or anything like that continuing yes.
Yes, it's really hard.
Quantify that but we would say kind of low single million dollars of revenue associated with that.
Perfect.
And then just one more for me just sort of longer term you talked about sort of the product pipeline.
Some growth focus areas and maybe focusing a bit more on growth, maybe just kind of expand on some of the products.
And Youre excited about.
Yes, I mean, we're excited about.
The long term growth opportunities in those secular growth areas of our clean energy light weighting safety health and technology.
Where there is some nice tail winds from from regulatory and legislative initiatives, social our social mandates.
<unk> holds a great opportunity to.
To address some of the key challenges facing our world in sustainability and safety and in.
And technology, so we talked quite a bit about about hydrogen and we might we remain really excited about that.
The elevated hydrocarbon pricing and awareness of <unk>.
<unk> Securities.
Really helping underlying that.
And we're really really pleased that two of our hydrogen customers or about to enter low volume production now with medium and heavy duty trucks in Europe , we secured an important follow on production order from a European bus manufacturer. So we like hydrogen we like Sanjay.
But we also like some of the elektron products around around clean energy.
The magnesium powder.
Technology that where we're looking at with lithium ion.
Client batteries, some possible uses of <unk> fuel cell.
Membranes, So yes, I could go on and on we like our positioning for the secular growth rate at clean energy light weighting and safety health and technology.
Excellent okay very good thanks.
I'll hop back in queue. Thank you.
Thanks Chip.
Thank you and our core recording of this conference call will be available in about two hours a link to a recording of the webcast will be available on <unk> website at www Dot Lux for Dot com.
For joining us today. The next regularly scheduled call will be in October of 2022, when the company discusses its third quarter 2022 financial results and some luck for conference call have a great day.
Okay.
Yeah.
Yes.