Full Year 2022 Luxfer Holdings PLC Earnings Call
Speaker 1: And no.
Speaker 2: Please stand by your program as about to begin. If you need any assistance to your conference today, please press star zero.
Speaker 2: After the speakers prepared remarks, we will hold a question and answer session.
Speaker 2: Now, I will turn the call over to Mike Gayden, Vice President of Investor Relations and Business Development from Luxfer. Mike, please go ahead.
Speaker 3: Thank you, Shelby. Welcome everyone to Luxfer's fourth quarter 2022 earnings call. With me today is Andy Butcher, Luxfer's Chief Executive Officer, and Steve Webster, Luxfer's Chief Financial Officer. On today's call, we will provide details of our fourth quarter in full year 2022 performance.
Speaker 3: as detailed in the press release issued yesterday. 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.
Speaker 3: 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.
Speaker 3: Please refer to the Safe Harbor Statement on slide 2 of today's presentation for further details. Now I will turn the call over to Andy for his summary comments on the quarter and our outlook, after which Steve will provide details of our financial results and 2023 guidance. Andy will then provide a longer-term view before Q&A. Andy, please go ahead.
Speaker 4: Thank you, Mike, and welcome everyone. Please turn to slide three.
Speaker 4: performance, which includes growth in sales and in adjusted EPS.
Speaker 4: The Luxor team once again stepped up to deliver for our customers, in turn helping us to realise full year earnings per share in line with guidance. I'm grateful for our team's ongoing focus and dedication.
Speaker 4: I'm particularly pleased to report that volume growth accelerated in Quarter 4 to $9 million with both electron and gas cylinders posting their best volumetric performance of the year.
Speaker 4: This strong quarter 4 reinforces our confidence in our long-term plans for profitable growth.
Speaker 4: We saw higher input costs once again during the quarter and we continued taking actions to pass through these changes wherever allowed by contract, including additional increases at gas cylinders.
Speaker 4: Overall though, higher costs and some operational disruptions limited the profit uplift from our incremental sales.
Speaker 4: Our executional focus helped us to translate our higher sales and earnings into expanded free cash flow and the $15.9 million generated in Q4 exceeded our expectations.
Speaker 4: Looking ahead, we are seeing softness in European demand and areas where customers are destocking.
Speaker 4: However, we are also driving important orders in some of our focused areas of growth including aerospace, defence and hydrogen vehicle systems.
Speaker 4: I would now like to turn to slide 4 to provide a brief update on the encouraging secular growth trends driving our business. During the fourth quarter, Gas Cylinders posted its best alternative fuel performance of the year.
Speaker 4: Capitalising on increasing interest in green energy, we executed successfully on elevated demand for our lightweight composite cylinders for the bulk gas transportation of both hydrogen and CNG.
Speaker 4: Additionally, a step up in passenger car manufacturing, coupled with ongoing stringent particular emissions regulations, is fueling demand for our autocatalysis zirconium products.
Speaker 4: The multi-year recovery in commercial aerospace continues, driving sales of our lightweight magnesium alloys, along with our in-cabin oxygen and inflation cylinders. We are also encouraged by the improvements in the supply chain for SCBA safety products, as well as the opportunities we see in healthcare for both our electron and gas cylinder segments.
Speaker 4: Against this background, I will now outline some of the key drivers of our 2023 outlook on slide 5.
Speaker 4: We see a mixed outlook for our end markets in 2023, but nevertheless we continue to expect overall volume growth. Sustained recovery at aerospace and automotive markets remains a notable tailwind for our transportation offerings.
Speaker 4: We are seeing ongoing demand in first response for our S.C.B.A. cylinders. While in defence, we anticipate higher aerospace, flameless Russian heater and chemical kit cells.
Speaker 4: We are seeing ongoing demand in first response for our STBA cylinders, while in defence we anticipate higher aerospace, flameless Russian heater and chemical kit sales. Alternative fuels will continue to be choppy.
Speaker 4: We anticipate hydrogen vehicle systems growing incrementally through the year, although lower requirements for bulk gas products.
Speaker 4: Some of our industrial offerings are seeing softness, particularly in Europe , and notably we're experiencing some transitory destocking by customers.
Speaker 4: However, we expect the secular drivers of our business to more than offset these isolated cyclical pressures as the year develops.
Speaker 4: We're working on several important initiatives to ensure our success amid key developments in the supply chain.
Speaker 4: US Magnesium LLC, the US domestic source for raw magnesium remains in force majeure and the facility is not currently supplying magnesium.
Speaker 4: We've made good progress with efforts to qualify an additional source of supply for the US military. Indeed, that work is successfully concluded for flameless ration heaters and well advanced for military flares.
Speaker 4: While this is being completed, we expect lower military flare sales in Q1 and early Q2 before resumption of a more normalised cadence over the rest of the year.
Speaker 4: In gas cylinders, we continue to address the inflation seen in raw materials, most notably carbon fibre.
Speaker 4: As part of this effort, we initiated further cost pass-throughs as of January 1st, when now permitted by contract.
Speaker 4: We are also working to remove additional fixed costs in this part of the business.
Speaker 4: We have already taken action during Q1, which will save more than $1 million annually, while we work to recover margins.
Speaker 4: during Q1 which will save more than $1 million annually while we work to recover margins. More broadly?
Speaker 4: We continue to see improving conditions across the supply chain.
Speaker 4: However, input cost inflation continues for several key materials.
Speaker 4: The cost of basic chemicals used in the electron segment continues to increase, for example, and energy costs remain elevated.
Speaker 4: Combined, these demand, supply chain and pricing dynamics, as well as our efforts to address and counter these impacts, suggest a low Q1 with quarterly EPS improving thereafter. Steve will discuss guidance shortly, first though, starting with details on our fourth quarter financial performance.
Speaker 4: Steve, thanks Andy. I'll begin on slide six of a summary of our performance by end market.
Speaker 4: I'm pleased to report that we experienced growth in each of our end markets during the quarter. In defence, first response and healthcare, we realised 19% growth on the back of strong military demand. Defence aerospace alloys, flameless ration heaters and chemical kits propelled our increased sales in this end market, while first response and healthcare held largely steady.
Speaker 4: Transportation sales rose nearly 24% with all subcategories higher.
Speaker 4: Both Auto-Catalysis products and our Rotomag Performance Wheels alloy benefited from strength in your automotive market.
Speaker 4: Alternative fuels realised a second consecutive quarter of acceleration, amid ongoing commercial adoption of hydrogen for transportation.
Speaker 4: Commercial aerospace also contributed meaningfully to sales growth.
Speaker 4: General industrial sales expanded 13% helped by demand for Solumag as well as commercial applications for magnesium powders and zirconium for industrial catalysis.
Speaker 4: Graphic art sales of magnesium plates slowed however, which was influenced by competition and macroeconomic conditions, particularly in the consumer sector. We're encouraged by these sales results, which reflect the unique attributes of our product portfolio as well as the long-term attractiveness of our end markets.
Speaker 4: Now please turn to slide seven for a summary of our fourth quarter financial results.
Speaker 4: Fourth quarter sales of $116.7 million rose $18 million or 18% from a year ago.
Speaker 4: This growth came from both $9 million of positive contributions from volume and mix, as well as $13 million of price actions to offset rising input costs.
Speaker 4: Excluding $4 million of adverse throwing exchange movements, our underlying cells grew 22% on a constant currency basis.
Speaker 4: Consolidated adjusted EBITDA are in quarter four, decreased to 0.6 million dollars or 4%.
Speaker 4: Despite our actions to pass through inflation, cost increases of $13.6 million in the quarter offset our pricing initiatives.
Speaker 4: While we realized a healthy margin on our incremental volumes, adverse production variances and growth related headcount investment curtailed our overall profit for the period.
Speaker 4: Furthermore, we incurred in excess of $1 million of costs associated with the defense of a legal matter relating to the disposal of magnesium powder waste materials in 2018, which has been disclosed in our Form 10-K .
Speaker 4: We expect this higher rate of expense to continue throughout 2023 and into early 2024.
Speaker 4: Overall, we remain focused on navigating the dynamic pricing for our raw materials, while also managing costs within our control.
Speaker 4: To this end further price actions have been initiated from the start of 2023.
Speaker 4: Now let's review our segment results on slide 8. Electron sales of $64.9 million increased one-third from the prior year, driven by our sustained push to pass through inflation and a $5.4 million uplift from volume and mix, the best performance of 2022.
Speaker 4: Electron's EBITDA expanded by 28% to $11 million, helped by incremental volume and mix and effective cost pass-through as well as foreign exchange.
Speaker 4: Gas cylinder sales of $51.8 million rose at $1.8 million or 4%, led by a $3.6 million uplift from volume and mix, also the best performance of 2022.
Speaker 4: The pass through initiative contributed another $1 million.
Speaker 4: Combined, these factors more than offset the $2.8 million adverse sales impact from foreign exchange. EBITDA of $3 million declined from $6 million in the prior year due to timing of cost pass-through on certain contracts, partially offset by improvement in volume and mix, and cost-saving initiatives. Now, let's turn to our key balance sheets and cash flow metrics on slide nine.
Speaker 4: I'm pleased that our fourth quarter sales and earnings translated into further gains in our already sound capital position.
Speaker 4: We generated $15.9 million of free cash flow in Quarterfall, the third consecutive quarterly acceleration. This free cash flow in turn helped us reduce net debt by $7 million sequentially and improved our leverage to 1.1 times.
Speaker 4: 25% range that we outline during our quarter three earnings call.
Speaker 4: Our trailing 12 month ROIC of 14.9% illustrates the compelling profile of the Lapsit platform.
Speaker 4: We repurchase $4.2 million of stock during quarter-four, demonstrating our ability to dynamically allocate capital.
Speaker 4: Let's now turn to our 2023 financial guidance on slide 10. Taking to account the macroeconomic and end-market factors and the outlined earlier, we currently expect to deliver 2023 full-year adjusted EPS of $1.15 to $1.35.
Speaker 4: Our projection of 6 to 10% sales growth roughly evenly split between additional volumes and price underpins this EPS Outlook.
Speaker 4: Though we project underlying EBITDA similar to the prior year, higher legal interest and tax expense of 10-15 cents per share constrains our EPS expectations.
Speaker 4: Broadly, we expect quarterly EPS to accelerate into the middle and back half of the year, with quarter-one results limited in gas cylinders, particularly by project timing affecting alternative fuels.
Speaker 4: Additionally, in electron, de-stocking is impacting Solumag and finalisation of the qualification of alternative magnesium materials will result in temporary pause in our magnesium flare cell to the military.
Speaker 4: Overall, Quarter 1 adjusted EPS is likely to be in the range of 20 cents, with strong improvement thereafter.
Speaker 4: We expect free cash flow to expand year over year in 2023, helped by lower restructuring cash expenditures, as well as our continued focus on working capital management. We plan to reinvest a portion of this incremental free cash flow into high visibility growth projects within Electron and in alternative fuels.
Speaker 4: Given an improvement in the funding position, we again expect no contribution to our UK pension plan in 2023.
Speaker 4: Furthermore, we aim to buy out our US pension plan in the first quarter for around $3.5 million to eliminate this liability and further simplify our balance sheet.
Speaker 4: While acknowledging that our 2023 adjusted EPS is constrained, this 2023 plan advances our effort to drive incremental volumes and free cash flow, while also reinvesting for organic growth and further solidifying our attractive capital position.
Speaker 4: And now I'd like to turn the call back over to Andy. Andy?
Speaker 4: Thank you Steve. I will now provide an update on two key areas of focus. Our path to $2 in adjusted earnings per share and how that goal is supported by implementation of the Luxor Business System.
Speaker 5: Please turn to slide 11.
Speaker 5: To advance to our long-term EPS goal, our pathway includes three key aspects. We target 33 cents from profitable organic growth.
Speaker 5: We expect both new products and growing secular demand in key areas of our business to drive these incremental profits. This will include further development of the hydrogen market, which for gas cylinders remains the largest source of potential growth over the next several years. Within our Electron segment, we expect to drive success in newer commercial products in both magnesium and zirconium.
Speaker 5: the return of more normalized operating conditions in the European industrial sector relative to the current 2023 baseline should also contribute. We anticipate another 29 cents from margin recovery. The gas cell in the business in particular is being impacted by outsized increases seen in carbon fiber, energy and labour costs.
Speaker 5: Our expectations are prepared of stability to emerge in these areas, which will provide an opportunity for margin recovery.
Speaker 5: We will also benefit from structural cost savings in both our powders and gas cylinders businesses.
Speaker 5: In addition, we expect 13 cents of uplift from lower legal and finance costs, including the end of the currently elevated legal charges that Steve outlined. As a leadership team, we hold a clear line of sight to this $2.0-plus EPS goal. All across the business, we are actively working towards its attainment.
Speaker 5: The Luxor Business System is one of the key tools that we're employing to deliver both growth and customer satisfaction. Please turn to slide 12.
Speaker 5: On our last call, we introduced our enhanced internal operating model for Luxfer Business System.
Speaker 5: Key members of our team are working to develop and implement the components of this program, which will serve to unlock the growth potential embedded in our business.
Speaker 5: Sustainability forms one key element of the model. Today I'm highlighting here our second bi-annual sustainability report as published in December . I encourage you to review the report when convenient. You will see that Luxfer achieved a 30% decrease in absolute emissions at the end of 2022 compared to 2021.
Speaker 5: I'm proud of the involvement our team has delivered on key GSESG goals in the last few years and I look forward to reporting our incremental progress to you and our customers in the future.
Speaker 5: Now let's conclude by refreshing briefly on Luxfer's strong position for value creation. Please turn to slide 13.
Speaker 5: Luxvers mission to help to create a safe, clean and energy-efficient world continues to grow in relevance and importance.
Speaker 5: We are working to harness the tailwinds of secular growth embedded in our portfolio with our market leading products that generate attractive financial returns.
Speaker 5: Combine with our efforts to drive innovation and address our many compelling commercial opportunities we see a bright future ahead of us. Now I would like to turn the call over to the operator to begin the Q&A session.
Speaker 2: Shelby, please go ahead. At this time, if you would like to ask a question, please press the star and one on your touchtone phone. You may remove yourself from the queue at any time by pressing star two.
Speaker 2: Once again, that is star and one to ask a question. We will pause for a moment to allow questions to cue.
Speaker 2: And we'll take our first question from Phil Gibbs with KeyBank.
Speaker 6: Good morning, Phil. How are you? Good. Can you talk a little bit about the legal and tax and interest that you're speaking of specifically? I mean, I think you started off by saying underlying EBITDA, it's similar to you around here in Q1, but then you have these other items, so maybe just talk.
Speaker 4: talk to those things. Yeah, thanks Phil, I'll take that. Yeah, first of all the legal, I mean obviously we can't go into too many details about the case itself over in what's disclosed in our 10K, but in terms of cost, yeah, so it basically picked up a little bit in the year and quarter four we saw in excess of a year, we saw a little bit of a decrease in the cost of the 10K, and then we saw a decrease in the cost of the 10K,
Speaker 4: that we have is slightly elevated at the moment but also the interest rates are higher. So we're paying around about 6 to 7 cents, our incremental borrowing rate which is historically quite high. So basically that will be driving a higher interest cost clearly as we generate free cash flow and we're expecting to do...
Speaker 4: So it has been enacted and it's going ahead the corporation tax rate in the UK is going up from 19 to 25 percent from April 60 70 percent of our profits are in the US so the the rest of roughly in the UK So just taking a weighted average that that sort of drives our an increase increase in our ETR to around about 23 percent We're modeling so
Speaker 4: Combined there you can see the sort of impact on our EPS. EbitDAR as we say underlying excluding illegal costs which obviously is a normally a little bit done matter but if you strip that out our EbitDAR is round similar number to or expected to be round about a similar number to what we've had this year.
Speaker 6: Thank you for that. And then as it relates to defense, I think you started off the call by saying that there's a good outlook for aerospace and defense and throughout. Don't worry.
Speaker 6: things like flameless ration heaters and decontamination and military flares, but then also said that there's sort of a bit of a buying hiatus in the first part of the year. So maybe maybe take us through the full year outlook and then the thoughts behind the timing.
Speaker 5: and our cylinders business. Flameless Russian heaters and chemical kits have ticked up nicely, so we're projecting a consistently strong year in those areas. In terms of the military flares, we will see those down a little in quarter one and in quarter two.
Speaker 5: Indeed, some of the military flares are already approved, but these are sophisticated alloys and empowers. So there's maybe one to three months still to go to approve all of those. And then we'll see that pick back up at a normalized sort of cadence as we go through the year.
Speaker 5: So, so broadly, yes, Aerospace and Defence for the year will be positive for us. And as we think about the business and.
Speaker 6: based in defense for the year will be positives for us. And as we think about the business and the entirety
Speaker 6: Is it fair and maybe just excluding some of these legal costs for now? Is it fair to think that you've got some price-cost challenges and electron and then some price-cost improvements with some of the new contracts you've written in cylinders? Is that a broadly a good way to think about it? Maybe a little bit different to that. So...
Speaker 5: was only 12% of the business in composite cylinders where we were able to pass on all of our costs. That increased to about 40% as we started this year. Further contracts roll off and by the end of the year that's up to 70%. So some good progress on cylinders but still some restrictions in place.
Speaker 5: In Electron we've been successful in passing through costs as you commented. So improving situation overall.
We've been successful in passing through costs as you commented. So improving situation overall. Thank you.
And once again to ask a question, please press star 1.
We'll take our next question from Chip Moore with EF Hutton. Good morning. Thanks for taking the question. I appreciate all the thought. I wanted to ask about the 25 targets. Do you think it's handicap biggest risks? I think it is.
You talked about maybe expecting some normalization in the European area, for example. Just curious about some of the underlying market assumptions. Yeah, thanks Chip. We're prepared to share, we're pleased to be able to share some of the details behind that $2 EPS goal in this call. I think overall the goal I'd categorize as...
suitably ambitious and as achievable. If we think about some of the risks to that, the lowest risk must be on the 13 cents that we have related to legal and financial. I just don't see the one-off legal situation extending into 2025 and our cash generation should lead to lower finance models. I guess there's an incrementally higher risk associated with the margin improvement part of the model.
We do have strong value propositions, but we recognise customers have options and competitors of forces will have some impact. The highest risk in the model must be around profitable growth, market and product development offers uncertainty, but we really like Luxus' tie into a secular growth.
And we're investing to make it happen Chip.
Perfect, that's helpful. To that point, maybe in my follow-up, maybe you can expand on some of the more recent investments and some of the areas you're investing in in just in terms of newer products, you know, reception and what you're excited about on the horizon. Yeah, so we do have elevated capital investment in...
and then a significant part of the remaining capex is allocated to gas cylinders including hydrogen capabilities.
There are no shortage of good opportunities for investment, frankly. So we've prioritized those that support our profitable growth along, of course, with some necessary maintenance and safety and environmental related projects. Thank you very much. Thank you very much.
Thank youit appears that we have no further questions at this time. An Encore 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 lux for website at w.
Thank you for joining us today. The next regulatory schedule call will be in late April when the company discusses its first quarter 2023 financial results. This ends the Luxfer Conference call.