Q2 2023 Luxfer Holdings PLC Earnings Call

Okay.

Good morning, My name is Chelsea and I will be your conference operator today.

Welcome to Lux versus second quarter 2023 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 Mike Gaydon, Vice President of Investor Relations and business development from Luxor, Mike. Please go ahead.

Thank you Chelsey welcome everyone for what for second quarter 2023 earnings call with me today is Andy Butcher walks first Chief Executive Officer, and Steve Webster Flex first Chief Financial Officer.

On today's call, we will provide details of our second quarter performance as reported in the press release issued yesterday.

Today's webcast is accompanied by a presentation that can be accessed at locks for 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 a summary comments on the quarter and our outlook after which Steve will provide details of our financial results and updated 2023 guidance and he will then offer some additional comments 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 second quarter performance, which included sequential gains in both adjusted EPS and cash flow.

Our team at Luxor again worked successfully to deliver for our customers in a dynamic environment and to take actions to improve our bottom line results.

Combined these efforts enabled us to deliver quarterly adjusted EPS of <unk> 27.

Ahead of the expectations outlined in our Q1 call.

Total sales increased to $110 million.

Led by gas cylinders, which increased sales by 5% with success in alternative fuel and medical markets.

Gasoline just adjusted EBITDA, which is the highest since Q4 2021 underscoring our ongoing efforts to further recover inflation of the last few years and to manage our costs in that business segment.

So mitek solutions delivered the highest revenue since Q4 2017.

<unk> strong results in our defense first response and health care markets.

Similar to Q1, however, transportation and general industrial sectors weight on our overall performance.

The softness we discussed last quarter in these areas became more pronounced in Q2 impacting our short term outlook.

Against this demand backdrop, we've undertaken actions to reduce costs drive cash flow and reinforce our strong capital position.

$10 million in Q2 free cash flow and we liked it $5 million reduction in net debt reflects that drive to work for atopic sufficiently in the current environment.

And while our back half outlook has pressured we remain optimistic about our opportunities for growth in sales and other things over the long term.

I would now like to turn to slide four to provide an update on current business conditions.

Over the last 90 days, we've experienced an increase in the external headwinds facing luxor.

The broadest base phenomenon impacting our outlook is the destocking that we are seeing as customers take a more cautious approach to inventory holding.

In an environment of higher interest rates some customers have shown increased price sensitivity and tight labor conditions continue to inhibit the conversion of end user demand into orders and otherwise more buoyant markets.

Turning to the supply chain, they're now further competitive pressures and our graphic arts business.

As we discussed previously the ongoing outage of U S. Magnesium has driven us to source non domestic rule magnesium as a higher cost.

In addition, increasingly aggressive competition information manufacturers in the European market has impacted performance for this product line.

In response, we are working to reduce variable costs and to launch a new differentiated product to help reinforce our positioning.

In hydrogen growth continues although the rate of market development remains constrained by the push outs of fuel availability government approvals and project delays.

We remain optimistic about the attractiveness of this promising market.

Two other macro factors also weighing some what's on our results.

Recent weakening of the U S dollar against the pound will input will inhibits our reported profitability given our appreciable U K manufacturing footprint in.

In addition, higher interest rates, the real estate pulling our profits lower year over year.

We are taking meaningful action across the organization in response to these external challenges, which I will detail later in the call.

Despite the pressure bought by these external factors, we remain focused on our business objectives for 2023 and beyond having made investments in talent and capabilities to position us for sustained profitable growth.

Steve will now discuss our updated outlook for 2023 after being more details about our Q2 performance.

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

Defense first response and health care sales expanded by 42% driven by sustained strength in military demand continuing the trend seen in the last two quarters.

That was a chemical kits M. A reason countermeasure flash for the military led gains in this end market.

Medical oxygen. So then doesn't pharmaceutical sales in elektron rounded out our increases in this category for the quarter.

Transportation sales declined 11%.

Following a period of substantial restocking, we realized lower inflatable sales, while automotive remains substantial but softened later in the quarter.

However, alternative fuels increased led by sales of our high capacity G. Still go C N G cylinder.

With hydrogen revenue is also higher.

General industrial sales decreased 23% following Q1's, 8% decline.

We saw weakness in magnesium photo engraving plate and industrial gas cylinders area as we have highlighted on our prior calls.

Encouragingly, Sony Mac sales looks to be turning a corner and is showing some signs of recovery.

The performance of our end markets this quarter underscores the benefits of our significant tied to less cyclical sectors like defense first response and health care.

Why was the positives without linkage to secular growth areas such as clean energy.

Now please turn to slide six for summary of our consolidated second quarter financial results.

Second quarter sales of $110 $4 million increased <unk> $9 million from the prior year.

This growth was underpinned by $6 $5 million of price actions to pass through rising input costs.

Actually offset by adverse volume and mix.

Consolidated adjusted EBITDA was $14 $4 million in Q2 decreased $2 $5 million in the prior year.

Price recovery exceeded inflation by $1 $6 million, which was offset by negative impacts from volume mix of $3 $9 million and foreign exchange at zero point $4 million.

We continue to take action to reduce cost and drive efficiency gains as well as to further address inflationary dynamics and the present demand environments.

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

Okay.

Elektron sales of $61.9 million decreased 2% from the prior year, driven by volume mix, which was partially offset by price increases.

Electrons adjusted EBITDA of $9 $5 million decreased 28% due to volume mix effect as well as the impact of legal fees.

Timing and a recovery of inflationary costs during 2020 to make year over year comparisons challenging for this segment throughout 2023.

Gas cylinder sales of $48 $5 million increased 5% helped by our efforts to address cost pass through partially offset by volume mix and foreign exchange.

Adjusted EBITDA was $4 $9 million rose, 32% from $3 $7 million in the prior year due to inflation recovery in fixed cost savings projects.

More broadly we expect to advance our initiative to restore gas cylinders margins as we progress into next year.

Now I'd like to update discuss our updated 2023 outlook on slide eight.

As a result of the external demand environment as Andy outlined earlier in the cold we are updating our full year outlook.

The demand conditions suggest a revenue decline of one 4% for the year.

While we continue to take measures to underpin our profitability amid this reduced sales outlook. We now target 2023 full year adjusted EPS of <unk> 88 cents to one dollar.

As demonstrated by our Q2 performance. We are also focused on cash generation and inventory levels, the latter of which were favorably reduced by $10 million in the quarter.

Furthermore, we are maintaining our 100% Gulf adjusted free cash flow conversion.

Working hard to deliver this in the current operating environment.

While continuing to invest in sustained profitable growth, we are moderating our planned capital investment for the year by $2 $5 million at the midpoint to a range of $10 million to $12 million as cost of our response to the external environment.

Recognizing the challenges ahead for the medium term I look forward to updating you on our progress to not only deliver on our 2023 financial objectives, but I'll further efforts to reinforce our positioning for long term growth.

Now I'd like to turn the call back to Andy Andy.

Thank you Steve as promised I will now share specific details on how we are leveraging our operational excellence expertise to mitigate the impacts on our business. If the stressed demand environment. Please turn to slide nine.

<unk> has a strong heritage of lean operations, which has been embedded in our culture for almost three decades and now forms part of the likes of a business system and the goal of $2 adjusted EPS in 2025.

Using these capabilities, we have worked quickly to remove both fixed and variable costs from our business.

Firstly in gas cylinders, we took steps to simplify our footprint during Q2 transferring alternative fuel production from Pomona to our other north American facilities in Riverside in Calgary.

This maximizes both our efficiency and that's how total output and it's delivering $1 $1 billion of ongoing annual fixed cost reductions through head count elimination and other savings.

Secondly in electrical we are in the very final stages of the project to consolidate our three power just manufacturing sites into just two facilities.

This delivers a further $900000 of annualized savings beginning in Q4 and allows us to sell one of our own manufacturing sites.

Thirdly across our business in response to the lower demand environment, we have moved quickly to generate savings through optimizing our head counts.

It's unfortunate but necessary activity is reduced number of employees by for example over 10% and graphic outs and Mitek solutions.

Finally, as Steve reported we are focused on reducing inventories in order to drive free cash flow, while maintaining our current high levels of customer service.

We expect our emphasis on lean operations, including these current initiatives to provide significant long term gains and our drive for sustained profitable growth.

Now, let's conclude by quickly reviewing blocks with strong position for value creation. Please turn to slide 10.

Despite some near term challenges with industrial demand <unk> mission to help to create a safe clean energy efficient world holds growing residents amid increasing appreciation of the importance of climate change and defense preparedness among other areas.

Our cost and efficiency actions now underway will help support our bottom line performance in 2023.

At the same time, our investments in innovation and talent to drive growth, we will create value over the long term.

We are deploying the right strategy, we are focused on the right markets with long term growth drivers. We are commercializing the rights differentiated products, we remain confident in the bright future ahead of us.

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

Please go ahead.

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At this time, if you would like to ask a question. Please press the star and one Keith on your Touchtone phone.

You may remove yourself from the queue at any time by pressing star Q.

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And it appears 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 Luxor website.

W. W Dot Luxor dotcom.

Thank you for joining us today.

Our next regularly scheduled call will be in late October when the company discusses its third quarter 2023 financial results.

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