Q3 2022 Luxfer Holdings PLC Earnings Call

Davidson.

[music] R&D.

Yes.

Good morning, My name is Katie and I will be your conference operator today welcome to the Luxe first third 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 <unk>.

Gayton, Vice President of Investor Relations and business development for Lux for Mike. Please go ahead.

Thank you Kate and welcome everyone to <unk> third quarter 2022 earnings call with me today is Andy Butcher, <unk>, Chief Executive Officer, and Steve Webster, <unk> Chief Financial Officer.

On today's call, we will provide details of our third 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. Andy will then provide some concluding remarks before Q&A.

Please go ahead.

Thank you, Mike and welcome everyone. Please turn to slide three.

I'm pleased to share with you details of our third quarter performance, which includes year over year growth in both revenues and profit.

I want to start the <unk>.

By expressing my appreciation to the entire Luxor team, who once again took on the challenging supply chain environment to serve our customers.

Our team's ongoing focus and dedication has helped to sustain the momentum of our first half results.

On this slide I want to highlight three key messages.

Firstly regarding our quarter three financial performance, we delivered nearly 10% year over year sales growth continuing in the gains realized in both quarters, one and two.

This quarter three revenue growth was primarily driven by our ongoing success in passing through cost inflation.

Which more than offset foreign exchange headwinds.

Our Q3 adjusted diluted earnings per share of 35 <unk>.

Continues our progress towards achievement of our existing full year guidance.

Electronic game that outperformance driven by successful execution in a wide variety of end markets.

Cylinders continues to work through inflation related challenges passing through current cost increases wherever allowed by contract.

Our capital position remains a source of strength with a net debt to EBITDA ratio of one two times.

Secondly.

We continue to see solid overall demand in Q3.

We realized 30% revenue growth in the general industrial end market and 7% growth in defense first response and health care.

Supply chain remains challenging with continued pressure on both material availability in some areas and higher costs.

Although we are seeing some indications of slowing demand in certain European end markets, we still benefit from a healthy overall backlog at the end of Q3, well ahead of prior year.

Thirdly.

Based on a combination of a sound year to date results and our assessment of the macroeconomic outlook in supply chain. We now expect to deliver 2022 adjusted diluted EPS of $1 35 to $1 40.

Compared to our prior range of $1 35 to $1 50.

And we remain committed to achieving our longer term EPS goal of $2 or more.

We are also focused on cash flow conversion of mitigating the impacts of climate to oil prices on our working capital levels.

Turning to slide four I would like to provide more details on the current business conditions.

During the third quarter, we again realized a solid pace of overall order flow.

We've seen early evidence of some modest slowing in certain European sectors, such as industrial gas cylinders and some magnesium rolled products.

We are encouraged by medium term demand for alternative fuel cylinders and for Flameless Russian heaters among other products.

We ended the quarter with a healthy order book upon which to execute through year end and into 2023.

At the same time supply chain challenges persist in certain key areas.

I want to first update you on the force majeure status at U S magnesium.

Towards the end of the quarter the supply from U S. Magnesium powders business was hosted well they undergo some essential maintenance.

There is low impact to our business in Q3 and Q4 due to the strategic stocks we have in place.

And with the support of our customers. We have secured some limited supply from an alternative supplier. It's a couple of medium term demands we're underway with initial work to qualify this material.

We're also seeing sustained tight supply conditions for aramid aerospace fiber.

<unk> will go to work on identifying alternatives is gaining momentum.

The availability of manufacturing labor has improved somewhat well theres still limits our ability in certain areas to capitalize on strong demand conditions.

Great bottlenecks have reduced which is helpful.

We continue to work through the latest market developments, including volatility around energy and raw material costs, most notably the higher electricity prices in Europe , and the continued increases in the cost of carbon fiber.

The new activities on further cost pass through underway in response to these.

While the strong dollar has served as a headwind to our revenue results. It is both a positive impact to our bottom line results year to date.

We're also pleased to acknowledge the incremental long term positives for by the passage of the inflation reduction Act in August which will help the development of the domestic hydrogen markets.

Yeah.

Given this backdrop, we continued to emphasize a tactical focus on successful execution with close coordination with both customers and suppliers.

We also remain ready to respond to any softening macro conditions as part of this we've built a recession case scenario into our medium term planning, which recognizes the risk of further weakening in the outlook for the global economy.

This brings the possibility of lower demand in 2023, and the need for us to manage discretionary spend whether this would likely be accompanied by an easing of the supply chain constraints, which have provided a headwind to us throughout the year.

You will also remember the top balance portfolio holds many diversification benefits.

Including supply to resilient industries like defense first response and health care.

Our top line also benefits from the recurring replacement cycles associated with a number of our products.

From a cost standpoint, we benefit from our simplified manufacturing footprint and the ability to adjust capacity until pivots our cost profile.

Our low leverage and a high liquidity position also bring flexibility.

For all these reasons I remain confident in our business performance, even if macroeconomic condition slow.

Now, let me turn the call over to Steve for details on our third quarter financial performance.

Thanks, Andy I'll begin on slide five is a summary of our performance by end market.

And the defense first response and health care end markets quarter, three sales rose by six 8% as growth in defense aerospace alloys, and medical cylinders more than offset lower demand for Flameless, Russian heaters, which was expected given the low levels of U S troop deployments in the field.

Quarterly sales and transportation decreased six 1% contraction in alternative fuel sales more than offset expansion in the auto catalysis in commercial aerospace and buckets.

Which continued to rebound towards pre COVID-19 levels of activities.

We expect alternative fuels to build upon the sequential improvement seen in quarter three amid signs of deepening commercial commitment to hydrogen transportation and storage applications backed by government funding initiatives.

Our general industrial sales grew 30% year over year in Q3, leading our overall revenue expansion for the quarter.

Elektron sales increased in nearly all industrial categories, continuing the broad based strength in quarter two.

Commercial magnesium powders zirconium applications and broad industrial products fueled this industrial strength.

Overall, we are encouraged by Q3 sales results helped by our differentiated product offerings.

Now please turn to slide six for a summary of our third quarter financial results.

Third quarter sales of $100 $2 million increased 9.0 million or nine 9% from the prior year.

Our quarterly revenue benefited from $13 $3 million of price actions taken to address input cost increases as well as from volume and mix contributions of <unk> $6 million.

We experienced foreign exchange headwinds of $4 $9 million, meaning sales revenues increased by 15% excluding foreign exchange.

Consolidated adjusted EBITDA was $16 1 million for the quarter increased $2 3 million or 16, 7% from the prior year helped by our success in passing along inflationary costs and growing volume in a challenging environment.

FX contributed a positive <unk> $8 million to EBITDA and our active cost reduction and efficiency efforts added another zero point $7 million.

We're pleased with our quarter three year to date performance amid the challenges posed by the current operating environment.

Now, let's review our segment results on slide seven.

Elektron revenues of $56 $8 million increased 24, 6% from the prior year driven by our timely access to pass through inflation as well as sustained strong demand in our transportation and industrial end markets.

Our elektron EBITA of $12 $7 million increased by 51, 2% helped by strong execution foreign exchange are placed and ongoing cost saving initiatives.

They are still in this segment sales of $43 $4 million decreased $2 2 million or four 8% from the year ago quarter, driven by a $2 $6 million adverse foreign exchange impact.

EBITDA was $3 $4 million decreased $2.0 million in the prior year as timing constraints on our ability to push through cost inflation on certain contracts detracted from profitability.

As a reminder, we've taken actions were permitted to recoup materials inflation, which will start to bear fruit from quarter one of next year.

Now, let's turn to our key balance sheet and cash flow metrics on slide eight.

<unk> capital position remains one of our key business strengths, our balance sheet continues to enable us to support our customers amid the strained supply chain seen in recent quarters.

We generated $1 3 million of free cash flow in Q3 up from zero point $6 million delivered in Q2.

Our working capital at 29% of annualized sales exceeds our targeted range. We are finding that our ongoing investments in inventory is serving as a key differentiator in our customer <unk> strategy.

Accelerating sales volumes realized within the quarter further contributed to our elevated working capital position at the period end.

We remain committed to our long standing 21% to 23% working capital target and project this to be near a 23% to 25% at year end, we will progress back towards the target level when supply chains normalize.

Our net debt of $75 $6 million and related net debt to EBITDA ratio of one two times afford flexibility that serves us well in the current climate, our trailing 12 month ROIC of 14, 7% demonstrates the investment attractiveness of electrical platform.

Let's now review, our updated 2022 financial guidance on slide nine.

Given the current macroeconomic outlook and supply chain challenges, we now expect to deliver full year adjusted EPS of $1 35 to $1 40.

We also currently project 2022 revenue growth of 9% to 12% constrained by the negative impact of foreign exchange translation, certain raw materials availability and the aforementioned signs of softening demand in Europe .

On foreign exchange a weak pound is generally favorable to the profitability of our UK business. We have a sizable portion of sales invoiced in currencies other than Sterling complementing a lower operating cost base when translated into dollars.

However, given that many of the key inputs of the UK sourced from the United States. The actual impact can be somewhat variable.

We expect 2022 capital expenditure of $8 million to $10 million.

While we are scrutinizing investment plans amid signs of a softening macro economy, we remain confident in our ability to backhaul many rewarding long term growth opportunities.

As we've said previously we expect no pension contributions in 2022 compared to 18 million dollar contribution in 2021.

And we expect exceptional restructuring cash outlays of around $10 million for the year.

Given the challenges posed by the external environment. We're very pleased to remain on track to deliver full year EPS results within our existing 2022 guidance range and we remain committed to our $2 or more long term EPS goal.

Finally, I'd like to review our capital allocation priorities on slide 10.

We continue to employ a balanced approach to redeployment of free cash flow.

Overall Lux for off price from a position of capital strength, which is an advantage against the backdrop of an evolving business climates.

We are prioritizing investments in our business is the highest return lowest risk use of our growth capital and we're proceeding judiciously in the current environment. We do expect this investments in innovation and productivity to drive our organic revenue and profit growth over time.

During quarter, three we again accelerated our share repurchase activity.

Year to date through the third quarter, we've repurchased six $9 million of shares which already outstripped the $6 $4 million total for all of calendar 2021.

We also continue to scrutinize and add to our bolt on M&A pipeline for opportunities that meet our selective growth and return objectives.

Recent macroeconomic developments reinforce the importance of our discerning framework for acquisitions.

This balanced approach to investing our free cash flow has served us well historically and will generate positive outcomes in the current environment.

And now I'd like to turn the call back over to Andy.

Thanks.

Thank you Steve.

Concluding our prepared comments I would like to reflect briefly on two milestones reached this year as well as our growth strategy developments. Please turn to slide 11.

2022 brings to 125th anniversary since our founding in Chicago as well as the 10th anniversary of our public listing on the New York Stock Exchange.

We have accomplished much since we began manufacturing innovative glass prisms backing 18, 97, and I am proud to have been with Lux for 30 years of this journey.

As I think about our mission to help to create a safe clean energy efficient world I want to highlight some of our successes.

Delivering technological advances that have reduced the weight of breathing apparatus cylinders by using carbon fiber, helping to increase safety for first responders.

Introducing proprietary magnesium alloys that have enhanced the capabilities of commercial and military aircraft.

Deploying fully integrated systems for the hydrogen markets across varying transportation modes, which are contributing to a cleaner environment.

Developing zirconium a magnesium based solutions aimed at lifting the performance and reducing the costs of both rechargeable batteries and fuel cells <unk>.

Supplying safe Flameless Russian heaters to those impacted by natural disaster, including recent shipments to those affected by flooding in Kentucky by Hurricane in Florida.

Finally, simplifying our facilities and our footprint to manufacture our products in a more integrated more flexible more automated and ultimately more sustainable way.

These successes and many others provide a great platform and we are resourcing the whole looks for team to continue to build on this platform to deliver long term profitable growth.

Now I would like to discuss one of the key tools that will enable our future success deluxe of a business system.

Please turn to slide 12.

Hello last call, we talked about the successful work of the last five years to simplify our manufacturing footprint.

Range on our cost base.

We discussed the opportunities that this now creates over the next five years for our focus on profitable growth.

And how this drive needs to be supported by the development of an enhanced internal operating model.

Over the last four months, we've created a definitive outline of what we're calling the luxury business system.

Customer commitments and growth from the very center of our framework.

On to deliver this we will execute best practice in six critical areas carefully selected after reviewing operating models and other leading manufacturing companies.

As well as evaluating the many pockets of excellence already existing within Luxor.

Detailed development of all areas of the business system are underway personally led by some of the key members of our leadership team.

I was excited over the last few weeks to participate in global luxury conferences on both sustainability and lean operations.

And I look forward to the execution of these programs, which will introduce in stages over the next 18 months.

In many ways my confidence in the medium to long term opportunities for our business has improved over the last three months.

Government incentives are helping to propel U S investments in clean energy.

The aerospace market is recovering and is requiring lightweight materials.

Demand for products related to safety health and technology are accelerating.

So we will continue to focus on near term execution, while also taking action to invest with confidence for our long term growth.

Good luck for business system is a key part of this.

Now I would like to conclude by highlighting briefly a strong position for value creation. Please turn to slide 13.

As you know <unk> mission is to help to create a safe clean energy efficient world.

With leading products that generates attractive financial returns, we are working to harness the tail winds of secular growth embedded in our portfolio.

We are bringing to market innovative products that target compelling commercial opportunities to further unlock value for our shareholders.

There is a bright future ahead of us.

We've been pleased to share our quarter three results with you today and we are focused on sustaining our momentum into year end and beyond.

Now I would like to turn the call over to the operator to begin the Q&A session Casey.

Casey. Please go ahead.

Thank you at this time, if you would like to ask a question. Please press star one on your Touchtone phone.

You may remove yourself from the queue at any time by pressing star Q. Once again that is star one to ask a question.

We'll 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.

Good morning, guys. Thanks for taking a couple of questions.

So.

Good morning, you talked about.

Early signs of softness in Europe affecting gas cylinders and graphic cards.

Hoping maybe you could go with just a little bit further there.

Yes. Thank you Chris good to talk to you. This morning, and those will be those will be the two areas.

In Europe .

<unk> impacted our outlook for quarter, four I, a little bit so in the gasoline business the specialty gas industrial market. So it can go go into some electronic applications and some environmental applications as well as some calibration gas.

Applications, we've seen.

The reduction in the order intake over the last four six weeks that and then on our rolled product side for for graphic graphic outs. We've also seen lower bookings that for quarter. Four now that said as pilot to a certain extent by somewhat stronger orders now coming in on all the.

Some of our magnesium products.

CPA cylinders and alternative fuel bus, but yes, we've seen some early signs of slowing in Europe .

Got it helpful.

So it looks like pricing still in catch up mode in gas cylinders, you know as you talked about constrained by contractual pass throughs. If I heard correctly, you will start seeing improvement there in Q1 is that right.

Yes.

Passing through our material cost increases to customers wherever allow by contracts and.

Payments and I think youll have seen overall, 99% year to date of our cost increases have been recovered. So so encouraged by up by by that in gas cylinders I guess two different elements to this euro.

European business, where we tend to have more spot business.

And Hey, we've just gone through our latest round of increases on both the aluminum cylinders.

And alternative fuel cylinders.

And then there's a composite business, where we do have some spot business where prices prices have already moved.

Some customer agreements that we're navigating.

On a decent sized segments of business, where we realized carbon pass throughs in January of 2023.

All of which has communicated to us to customers. So that's so that's helpful.

Now as I think we've discussed before we don't fully catch up until carbon prices normalize by which I mean capital prices stop increasing and perhaps even even decreasing.

But overall, yes, 99% year to date of our cost increases are being recovered across the business.

Got it I appreciate that and then last one for me is just you.

You had previously discussed the target you know a $2 plus adjusted EPS by 2025 today's presentation, just characterize it more as a long term adjusted EPS call without specifically, saying twenty-five anything that we should read into that.

We certainly remain committed to the 2025 goal and to the.

The $2 EPS level, so no change to that of course, we are conscious of the.

Macroeconomic changes that we're seeing at the other.

But we're thinking carefully about about 2023.

But we still at this time expect to deliver the $2 EPS in 2025, thanks for the clarification on that Chris.

Got it I'll leave it there I appreciate it guys. Thank you.

Thank you. Our next question will come from Phil Gibbs with Keybanc capital markets. Your line is now open.

Hey, good morning, Hi, Phil.

In terms of Europe can you just remind us what your your total revenue exposure there is in terms of your.

Just as a percentage of overall sales and then I know you also have a decent amount of production.

Within Europe as well, so maybe kind of frame up how we should be thinking about the production footprint in light of all the.

Energy price increases that we've been seeing in the region.

We're managing through that yes.

Yes. Thanks, so in terms of in terms of revenue breakdown, a little over 60% in the North and South America little over 20%.

In Europe , and a little under 20%.

In Asia, obviously that varies overtime, but thats typically how you say our revenues.

Terms of our manufacturing footprint the weights of our footprint.

As it is in North America.

Two facilities in the UK.

The UK one of those the Nottingham plants, making aluminum cylinders and assembling altra.

Alternative fuel systems.

In our elektron plants involved in both making magnesium and zaccone them. So that's the.

The footprint, Steve anything to add on that.

No I think that's fair enough did you also have a question Phil on energy costs.

No just in terms of those two those two assets in the.

In the U K in terms of how you're managing through the the energy.

Cost escalation there at least in terms of what we're seeing broadly if youre hedged or whether or not you've got some other things going on to manage to that.

Yes, I mean, clearly on energy, where we're keeping a close eye on the market and we do have an opportunity, especially in Europe to do some hedging. So we will we will project forward up to two years in terms of our energy needs as we see them in Europe .

We can forward by up to a 100% or potentially even more of our needs.

Obviously sell back if we if we overbuy.

But we keep an eye on the forward prices and if we see a price that that suits them, we will lock it in.

But there is a certain amount that will stay on the spot.

North America were more on contract.

And those contracts certainly run.

The current at the moment, but some of those come to an end sort of early next year and then we're obviously in negotiations for a.

New deals and that will clearly be some uplifting cost over and above what we've been paying to date.

Okay.

And then as we look at the net working capital in Q4, typically seasonally it's a it's a relief and I think you may be pointing to that how much how much of a release should we expect if that's the case for Q4 and then second question within there within the cash side is this cash restructuring you mentioned $10 million for the year, how much of that.

Has to be let out in Q.

Q4, thank you.

Okay, Yes.

The first point so yes.

You've obviously seen our working capital remains elevated and as I said in the in the prepared remarks, that's very much an investment in inventory, which continues we've always said that the supply chain is continuing to be challenging we would we would keep that till we would envision that level being elevated.

We are still seeing those challenges so hence it has not come down in fact, it has gone up sequentially. We would expect it to come down to I've said, 23% to 25% of annualized revenue in the fourth quarter I think that's a reasonable expectation.

It will free up some cash.

Although I think we're not going to stop making significant cash contributions and inroads into our current net debt level, probably until quarter. One next year.

And even I think in <unk>.

If supply chain conditions don't normalize completely in quarter, one I expect quarter. Once you pencil in quarter four in terms of cash generation.

So you had a second part of your question.

So the cash restructuring you outlined in your deck.

How much of that that is left in Q4.

There is about one to one and a half million, we're expecting to go through in quarter four.

Okay. Thanks, so much.

Thank you again, if you would like to ask a question. Please press star one to join the queue.

Our next question will come from Chip Moore with E. F. Hutton Your line is now open.

Yes. Good morning, Thanks for taking the question.

Wanted to follow up on.

Potential recession scenario planning you talked about it sounds like you have some levers you can pull it back.

It does take a turn for the worse.

I guess, how do you balance any of those near term uncertainties.

The medium term demand that you see on the horizon.

Yes. Thanks, Thanks chip good good morning.

We have been a recession case scenario into our into our medium.

Planning is as an option.

That works quite advanced is not completed yet and of course, we're seeing volatility in economic indicators.

<unk>.

If it happens I think we've properly preparing for that and we like the mix in our in our portfolio and the strength in horror.

Our balance sheet. So we're very we're very conscious under that two markets market developments.

At the moment, though we like where our order book is is we have a good order book for the quarter for most of.

Most of our markets are booking well into <unk>.

Into quarter, one and quarter.

Quarter two so we're so we're pleased we're pleased about that we like what we're seeing next year, particularly magnesium alloys.

In <unk>, we expect alternative fuel too.

To continue some of the momentum we picked up in.

Quarter in quarter three so so we like what we're looking at in the in the order Bank, we're just making sure that we're where we're.

We're not we're not naive we're led to what's happening in the outside the outside world, but approach in 2023 I think.

Beyond with the spirit of optimism.

Perfect. Thanks, Andy and it is a follow up.

Just on innovation.

In terms of.

New product pipeline, maybe you can kind of walk us through what to expect there over the next 12 months to 24 months and then.

Look back at some I guess more of the more recent areas that youre excited about how those are progressing.

Yes, so it's been it's been exciting over the last three months to be reviewing.

The commercial opportunities that we're seeing with the <unk>.

New products. So thanks for the chance to come until the well that I think some of the things I'd like to highlight.

Would be maybe our zirconium solutions for Electrolyze and fuel cells.

Magnesium electrode technology for rechargeable batteries.

Pleased with the progress on the road to Mag alloy for light weighting and high performance automobiles.

The pharmaceuticals, the Conium product that we have <unk> filings.

Finding some good use in the growing medical application.

Starting to replace some of our old Arrow mid aerospace cylinders, we'd like to white carbon versions of the type III hydrogen cylinders.

Well with fast filling ethylene technology.

Magnesium rolled products unitize Russians for heating I could go on and on and on.

I really like while the business is doing on some of the summer.

The new product developments.

Good to hear.

Last follow up follow up on that.

Ticket flexibility.

Youre very flexible you've been active on the buyback and the leverage is quite low.

Okay.

Are you seeing.

Seen more on the bolt on side, maybe in some of those innovative areas or are you thinking more organic thanks.

Yes, yes, but yes to both of those.

Pipeline remains active.

We are seeing some evidence I guess of a slowdown in transaction is done and they are in the market we remain engaged.

We visited a potential target a couple of weeks ago, We got a meeting coming up next week, but nothing came in and all the all early stage.

Valuation seem to remain pretty high and we've not yet seen much of a multiple correction I would expect that.

To change, but but we do remain selective, especially given the macro uncertainties.

I'd say, we're active and alert to possibilities, but we continue to prefer reinvestment in organic growth is the best use of our capital.

Got it alright.

Alright, Thank you very much.

Thanks Chip.

Thank you this does conclude today's Q&A.

Encore recording of this conference call will be available in about two hours and a link to a recording of this webcast will be available on the Luxembourg website at Www Dot Bucks for Dot com. Thank.

Thank you for joining us today. The next regularly scheduled call will be in Q1 of 2022.

When the company discusses its fourth quarter 2022 financial results.

And so Lux for conference call have a great day.

Okay.

[music].

Thanks.

Yes.

Sure.

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