Q4 2023 Luxfer Holdings PLC Earnings Call
Operator: Good morning. My name is Todd, and I will be your conference operator today. Welcome to Luxfer's fourth quarter 2023 earnings conference call. All lines have been placed on mute.
Good morning, My name is Todd and I will be your conference operator today.
Welcome to <unk> fourth quarter 2023 earnings conference call all.
All lines have been placed on mute.
Operator: After the speaker's prepared remarks, we will hold a question and answer session. Now, I will turn the call over to Kevin Grant, Vice President of Investor Relations and Business Development at Luxfer Holdings. Kevin, please go ahead.
After the Speakers' prepared remarks, we will hold a question and answer session.
Now I will turn the call over to Kevin Grant.
<unk> President of Investor Relations and business development at Luxor, Kevin. Please go ahead.
Kevin Grant: Thank you, Todd, and good morning, everyone. This morning, we'll be reviewing Luxfer's financial results for the fourth quarter ended December 31st, 2023. I'm pleased to be joined today by Andy Butcher, our Chief Executive Officer, and Steve Webster, our Chief Financial Officer. This webcast is accompanied by a presentation that can be accessed at www.luxfer.com.
Thank you Todd and good morning, everyone welcome to <unk> fourth quarter 2023 earnings Conference call.
This morning, we'll be reviewing looks for its financial results for the fourth quarter ended December 31 2023.
I'm pleased to be joined today by Andy Butcher, Our Chief Executive Officer, and Steve Webster Chief Financial Officer.
Today's webcast is accompanied by a presentation that can be accessed at Lux for dot com.
Kevin Grant: 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 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.
Kevin Grant: Please refer to the Safe Harbor Statement on slide 2 of today's presentation for further details. During today's call, we will be providing adjusted fourth quarter and full year 2023 financial results that exclude graphic arts based on our strategic review decision to divest that business. Now, let me introduce Luxfer CEO Andy Butcher. Please turn to slide three. Andy, please go ahead.
During today's call, we will be providing adjusted fourth quarter and full year 2023 financial results that exclude graphic arts based on our strategic review decision to divest that business.
Now, let me introduce luxe for CEO Andy Butcher.
Please turn to slide three Andy.
Andy Please go ahead.
Andy Butcher: Thank you, Kevin. And good morning, everyone. Thank you for joining us. I would like to begin by acknowledging the dedication of the Luxfer team as they served our customers and focused with an optimized lens on all aspects of our operations. They delivered solid, and improved, results against the backdrop of challenging market conditions, as well as the added demand of our strategic review process. I am very grateful for their commitment.
Thank you Kevin and good morning, everyone. Thank you for joining us.
I would like to begin by acknowledging the dedication that likes the team because they sell it to our customers and focus with an optimized lens on all aspects of our operations.
They delivered solid and improved results against the backdrop of challenging market conditions.
Well, it's the added demand of our strategic review process I am very grateful for that commitment.
Today, we will provide details on our 2023 fourth quarter and full year financial performance.
Andy Butcher: Today, we will provide details on our 2023 fourth quarter and full year financial performance. Additionally, we will share important, positive information on our self-help actions, including new SCBA agreements, go forward insurance coverage for our elevated legal expenses, and some lower upcoming costs for magnesium. We will also provide an update on the initial decisions from our strategic review and, lastly, provide our 2024 guidance. We have a lot to cover today, so let's get started.
Additionally, we will share important positive information on our self help actions, including U S. C. B I agreements go forward insurance coverage for elevated legal expenses and some lower upcoming calls for magnesium.
We will also provide an update on the initial decisions from our strategic review and lastly, provide our 2020 full guidance.
We have a lot to cover today, so let's get started.
We achieved adjusted fourth quarter sales of $87.8 million.
Andy Butcher: We achieved adjusted fourth-quarter sales of $87.8 million, approximately 3% above the midpoint of guidance, underpinned by an increase in gas cylinder demand. For the full year 2023, adjusted sales were $373.5 million, a decline of 2.9% from the prior year, reflecting the industrial macro challenges we faced, particularly during the third quarter. Full year adjusted EPS of $0.80 exceeded our most recent expectations, and full year adjusted EBITDA was $43.3 million. In addition to better than expected sales and earnings, we generated improved operating cash flow, and full year free cash flow was more than double the prior year. Our balance sheet remains healthy, with net debt leverage of approximately 1.6 times.
The 3% above the midpoint of guidance and opinions by an increase in gasoline demand.
For the full year 2023, adjusted sales were $373 5 million a decline of 2.9% from the prior year, reflecting the industrial macro challenges, we faced particularly during the third quarter.
Full year adjusted EPS of 80 cents exceeded our most recent expectations and full year adjusted EBITDA was $43 $3 million.
In addition to better than expected sales and earnings we generated improved operating cash flow and full year free cash flow more than double the prior year.
Our balance sheet remains healthy with net debt leverage of approximately one six times.
Andy Butcher: This gives us additional assurance and the flexibility to continue investing in areas where we can grow in support of our customer value proposition. Steve will walk through the financial performance for the quarter and full year in more detail, but we are encouraged by the sequential momentum of our ongoing business as we exit in 2023, with a number of positive developments that we believe position us well for 2024 and beyond. The supply chain challenges we faced with our commercial magnesium have, to some extent, eased, particularly in areas outside of the USA. Though pricing is still at elevated levels relative to 2021, there is greater pricing stability, and this should help support our demand recovery in some of the electron industrial and transportation sectors. In the USA, supply of magnesium remains restricted, and price premiums in this region remain abnormally high.
This gives us additional assurance and the flexibility to continue investing in areas, where we can grow in support of our customer value proposition.
Steve will walk through the financial performance for the quarter and full year in more detail, but we are encouraged with the sequential momentum as our ongoing businesses. We exited 2023 with a number of positive developments that we believe position us well for 2024 and beyond.
The supply chain challenges, we faced with our commercial magnesium have to some extent east, particularly in areas outside of the U S. A.
So pricing is still at elevated levels relative to 2021 that is greater pricing stability and this should help support demand recovery in some of the electronic industrial and transportation sectors.
The USA suppliers magnesium remains restricted price premiums in this region remain abnormally high.
Andy Butcher: So, we have qualified and contracted for an additional source of magnesium, and this should support an improved position in a number of our end markets. As discussed in prior calls, we incurred elevated legal costs throughout 2023 and expected that these costs would continue into 2024. Today, I am pleased to announce that late in the fourth quarter, after detailed discussions, our insurance company determined that these costs will be covered. This will eliminate approximately $5 million of annual legal costs going forward, and we are taking action to recover historical costs.
So we have qualified and contracted for an additional source of magnesium and this should support an improved position in a number of our end markets.
As discussed in prior calls we incurred elevated legal costs throughout 2023.
These costs would continue into 2024.
Today I am pleased to announce that late in the fourth quarter. After detailed discussions our insurance company determined that these costs will be covered.
This will eliminate approximately $5 million of annual legal costs going forward.
Taking action to recover historical costs.
Andy Butcher: This is a tremendous development and eliminates some uncertainty from our results going forward. In addition, we've made further progress in the fourth quarter with the tactical operational actions we are taking to improve financial performance, including minimizing expenses, passing through higher input costs, and improving cash flow. I will return to those in a few minutes.
This is a tremendous developments and eliminate some uncertainty from our results going forward.
In addition, we've made further progress in the fourth quarter with the tactical operational actions, we are taking to improve financial performance, including minimizing expenses, passing through higher input costs and improving cash flow.
Oh, we're tend to these in a few minutes.
Andy Butcher: Firstly, and very important to us, I want to cover our comprehensive strategic review process. Let's turn to slide four for an update. In October, we announced an acceleration and expansion of our annual strategic review process. The motivation for this comprehensive and portfolio-wide exercise is to improve the performance of our businesses and unlock shareholder value, with the support from our Board of Directors. We have engaged Deutsche Bank as our financial advisor during this process. Today, I would like to share with you our findings from the initial phase of our review and their implications for the future of Luxfer. Firstly, we have determined that the graphic arts business is not central to Luxfer's go-forward strategy and does not fit with our value proposition.
Firstly and very important to us I want to cover a comprehensive strategic review process.
Turning to slide four prototypes.
In October we announced an acceleration and expansion of our new strategic review process.
The motivation for this comprehensive portfolio wide exercise is to improve the performance of our businesses and unlock shareholder value.
With the support from our board of Directors, we have engaged with Deutsche Bank as our financial adviser during this process.
Today, I would like to share with you our findings from the initial phase of our review and the implications for the future of Luxor.
Firstly.
We have determined that the graphic coutts business is not central to <unk> go forward strategy and does not fit with our value proposition.
Andy Butcher: This is a good business, delivering quality products and supported by an outstanding team. However, after thoughtful evaluation, we believe Graphic Arts would be better served by a sharper, more focused owner. Secondly, we have revisited our internal strategic growth plan and remain highly encouraged by the opportunities for improved performance over the next few years. We have already executed quick actions across our operations to improve the cost structure. We have identified several end-market megatrends that will drive higher demand for our products, including positive developments in the transportation sector, where Gas Cylinders is experiencing increased demand for a number of alternative fuel products, especially related to CNG in North America.
This is a good business delivering quality products and supported by an outstanding team.
However, after thoughtful evaluation, we believe coffee costs would be better served with a sharper focus to own that.
We are working with X M S capital partners to identify and engage a suitable buyer.
Secondly, we have revisited our internal strategic growth plan and remain highly encouraged by the opportunities for improved performance over the next few years.
We have already executed quick actions across our operations to improve the cost structure.
We have identified several end market mega trends that will drive higher demand for our products, including positive developments in the transportation sector, where gas cylinders is realizing increased demand for a number of alternative fuel products, especially related to <unk> in North America.
Andy Butcher: We are increasingly confident that both the gas cylinders and electron segments can deliver attractive, profitable growth during 2025 and beyond. Thirdly, and notably, we've determined that the remaining gas cylinder and electron segments have no significant strategic synergies and therefore there is no material benefit to these being owned by the same company. At the same time, while there is no overriding rationale to keep the businesses together, there is no immediate need to separate the two, and there is no reason why they cannot coexist under the same corporate structure, with the expectation that business conditions and macroeconomic market dynamics will improve during the periods ahead.
We are increasingly confident that both the gas cylinders and electronic segments can deliver attractive profitable growth during 2025 and beyond.
Thirdly, and notably we have determined that the remaining gasoline doesn't elektron segment's have no significant strategic synergies.
And therefore has no material benefits to these been evidenced by the same company.
At the same time, well there is no overriding rationale to keep the businesses together, there's no immediate need to separate the two and no reason why they cannot coexist under the same corporate structure with the expectation that business conditions and macroeconomic market dynamics will improve during the periods ahead.
With that flexibility, we have various mechanisms available to create value, including optionality for the possible sale of one or both businesses.
Andy Butcher: With that flexibility, we have various mechanisms available to create value, including optionality for the possible sale of one or both businesses. We will evaluate whether alternative ownership drives uplifted performance and value creation. In the meantime, we will operate and manage both businesses for their long-term success as they serve their customers by delivering the Luxfer value proposition. We are pleased with the progress to date of our strategic review. We have made some key decisions regarding the future composition of our portfolio, including the decision to sell Graphic Arts. We have refined the ongoing strategy of profitable growth in both electron and cylinders.
We will evaluate whether alternative ownership drives uplifted performance and value creation.
In the meantime, we will operate and manage both businesses for the long term success as they serve their customers by delivering the luxor value proposition.
We are pleased with the progress to date of our strategic review.
We have made some key decisions regarding the future composition of our portfolio, including the decision to sell the graph the cats.
We have refined the ongoing strategy of profitable growth in both electronic and southern does.
Andy Butcher: And, importantly, we have identified future options for our remaining businesses that position us to unlock maximum value for our shareholders. Now, turning to slide 5, let me update you on the impact of actions we undertook in 2023 to improve performance. In our electron segments, we have fully completed the consolidation of the electron powders plants, which is now delivering $900,000 in annual savings and the potential to sell the vacant site later this year. We have introduced a new source of magnesium for some of our North American facilities, and we have executed programs related to improving productivity and lowering fixed costs, all helping to offset the weak Q4 demand which materialized as we projected in our last call. Additionally, as I stated earlier, we have been able to confirm that we have insurance coverage for the abnormal legal charges we have been incurring, which eliminates the expense from our forward projections sooner than anticipated.
And importantly, we have recognized future options for our remaining businesses position us to unlock maximum value for our shareholders.
Now turning to slide five let me update you on the impact of actions, we undertook in 2023 to improve performance.
In our electrical segment, we have fully completed the consolidation of the Elektron powders clause, which is now delivering $900000 in annual savings and the potential to sell the vacant sites later this year.
We have introduced a new source of magnesium for some of our North American facilities.
And we have executed programs related to improving productivity and lowering fixed costs, all helping to offset the weak Q4 demand, which materializes. We project you did in our last call.
Additionally, as I stated earlier, we've been able to confirm that we have insurance coverage for the abnormal legal charges, we have been encountering which eliminates the expense from our forward projections sooner than anticipated.
In gas cylinders, we have new long term multi year supply arrangements with both of our major CVA customers.
Andy Butcher: In gas cylinders, we have new, long-term, multi-year supply arrangements with both of our major SCBA customers. These important agreements enable us to address high carbon fiber costs and restore margins while providing continuity to our customers. We are delighted to be retaining these relationships and to be providing our ultra-lightweight products to the domestic and global firefighter communities.
These important agreements enabled us to address high carbon fiber costs and restore margins, while providing continuity to our customers.
We are delighted to be retaining these relationships and to be providing a ultra lightweight products to the domestic and global five flights of communities.
Steve Webster: We have also completed the optimization of our North American alternative fuel footprint, already delivering $1.1 million in annual savings while significantly increasing output to meet the higher demand for CNG cylinders. And finally, we've begun the construction of our new bulk gas transportation module facility in Nottingham, UK, which will come online at the end of 2024, with future capacity for revenues of up to $40 million annually. We have made strong progress on improving overall performance. In addition, we've made important decisions on the long-term structure of our portfolio. These efforts position Luxfer to grow margins, improve profitability, deliver strong cash flows, and return cash to shareholders. There is still more work to be done, but we are already on our way to achieving levels of profitability that reflect the value that our innovative materials engineering delivers to our customers. At this time, I'll turn the call over to Steve to discuss our Q4 and full year 2023 results in greater detail, emphasize our strength and balance sheet, and provide our initial outlook for 2024.
We have also completed the optimization of our North American alternative fuels footprints already delivering $1.1 million in annual savings, while significantly increasing output to meet the higher demand for C. N G cylinders.
And finally, we have begun the construction of a new bulk gas transportation Montreal facility in Nottingham, UK, which will come online towards the end of 2020 full with future capacity for revenues of up to $40 million annually.
We have made strong progress on improving overall performance.
In addition, we've made important decisions on the long term structure of our portfolio.
These efforts position like such a great margins improve profitability deliver strong cash flows and return cash to shareholders.
There is still more work to be done, but we're already on our way to achieving levels of profitability that reflects the value of the top innovative materials engineering delivers to our customers.
At this time I'll turn the call over to Steve to discuss our Q4 and full year 2023 results in greater detail emphasize our strength and balance sheet and provide our initial outlook for 'twenty 'twenty four.
Steve Thanks.
Steve Webster: Thanks, Andy. I first want to echo Andy's sentiment about our excitement and the positive momentum we have made regarding the strategic review process. The acceleration and expansion of our annual strategic review have clearly identified optionality for the Board of Directors and the Luxfer leadership, which we can execute successfully. Now, I'll begin on slide six with a summary of our sales performance by end market. Please note that these financials and my comments exclude the graphic arts business for which we are in the process of identifying a suitable buyer. However, defense first response and healthcare sales remain strong, growing 9.7% compared with last year. This was driven by ongoing strength in lightweight SCBA as well as medical cylinders, offsetting anticipated lower fourth quarter demand for flameless ration heaters and chemical kits. For the full year, Defence first response in healthcare was up 23.9%, demonstrating both the strength and secular nature of our largest end market. Transportation sales decreased 22.3% in the quarter, and full-year sales decreased 10.2% compared with the prior year.
Thanks Sandy.
I first want to echo Andy's sentiments about our excitement and the positive momentum we have made regarding the strategic review process.
Acceleration and expansion of our annual strategic review, it's clearly identified Optionality to the board of directors and deluxe for leadership, which we can execute successfully.
Now I'll begin on slide six with a summary of our sales performance by end market.
Please note that these financials and my comments exclude the graphic arts business for which we are in the process of identifying a suitable buyer.
Defense first response and health care sales remained strong growing nine 7% compared with last year.
Driven by ongoing strength and lightweight CPA as well as medical cylinders offsetting anticipated lower fourth quarter demand for Flameless ration heaters and chemical cats.
For the full year Defense first response and health care was up 23, 9% demonstrating both the strength and secular nature of our largest end market.
Transportation sales decreased 22, 3% in the quarter and full year sales decreased 10, 2% compared with the prior year.
Steve Webster: In the quarter, areas of softer demand included autocatalysis material and aerospace applications. General industrial end markets continued to face macro headwinds, resulting in sales decreasing by 42.8% in Q4. As was the case in previous quarters, this impacted demand for applications such as commercial magnesium powders, industrial zirconium, and oil and gas. Full year adjusted sales decreased 25.6%. Please turn to slide 7 for a summary of our consolidated fourth quarter financial results. Fourth quarter sales decreased 17.4% from the prior year to $87.8 million.
In the quarter areas of softer demand included auto catalysis material and aerospace applications.
General industrial end markets continue to face macro headwinds, resulting in sales decreasing by 42, 8% in quarter four.
As was the case in previous quarters. This impacted demand in applications, such as commercial magnesium powders industrials are conium and oil and gas.
Full year adjusted sales decreased 25, 6%.
Please turn to slide seven for summary of our consolidated fourth quarter financial results.
Fourth quarter sales decreased 17, 4% from the prior year to $87.8 million.
Steve Webster: While we delivered strong favorable pricing of $7.2 million and received benefits of $1.2 million in foreign exchange, these were more than offset by lower volume and an unfavourable mix of $26.9 million, primarily in industrial and transportation markets. Fourth quarter adjusted EBITDA decreased $3.1 million from the prior year to $8.1 million. Adverse cost inflation and foreign exchange were positively offset by pricing. However, the business was not able to absorb end-market demand pressures impacting volume, which were primarily in electrons. Importantly, the combined business did achieve sequential adjusted EBITDA growth from the third quarter of 2023. Fourth quarter 2023 adjusted EBITDA margins were 9.1%. Turning now to slide 8 and our segment results. Reflecting our decision to sell Graphic Arts, that business is now reported in a separate segment, and our results shown on slide 8 do not include Graphic Arts.
While we delivered strong favorable pricing of $7 $2 million in receipts benefits of $1 $2 million in foreign exchange. These were more than offset by lower volume and unfavorable mix of $26 $9 million, primarily in the industrial and transportation markets.
Fourth quarter, adjusted EBITDA decreased $3 $1 million from the prior year to $8 $1 million.
Adverse cost inflation and foreign exchange were positively offset by pricing. However, the business was not able to absorb and market demand pressures impacting volume, which were primarily in elektron.
Importantly, the combined business did achieve sequential adjusted EBITDA growth from the third quarter of 2023.
Fourth quarter 2023, adjusted EBITDA margins were nine 1%.
Turning now to slide eight and our segment results.
Reflecting our decision to sell graphic arts that business is now reported in a separate segment in our results shown on slide eight do not include graphic cards.
Gas cylinders fourth quarter 2023 sales of $51 $7 million were relatively flat with last year as higher S. CPI in medical sales were offset by lower demand for alternative fuel and industrial cylinders.
Steve Webster: Gas Cylinders' fourth quarter 2023 sales of $51.7 million were relatively flat with last year, as higher SCBA and medical sales were offset by lower demand for alternative fuel and industrial cylinders. Despite flat sales, we achieved a significant increase in adjusted EBITDA, more than doubling to $6.5 million, supported by the cost pass-through on our newly negotiated cylinder supply arrangements and by increased demand. Electron's fourth quarter sales decreased 33.8% from the prior year to $36.1 million, driven by lower demand and an unfavorable mix in the general industrial end market, slightly offset by pricing and FX tailwind. Adjusted EBITDA of $1.6 million decreased from $8.2 million primarily as a result of lower demand that more than offset positive price versus inflation. Now, please turn to slide nine to see our full year 2024 financial outlook. Please note that this does not include the graphic arts business.
Despite flat sales, we achieved a significant increase in adjusted EBITDA more than doubling to $6 $5 million supported by the cost pass through one of our newly negotiated cylinder supply arrangements and by increased demand.
Elektron fourth quarter sales decreased 33, 8% from the prior year to $36 $1 million driven by lower demand and unfavorable mix in the general industrial end markets slightly offset by pricing and FX tailwind.
Adjusted EBITDAR of $1 $6 million decreased from $8 $2 million, primarily as a result of lower demand that more than offset positive price versus inflation.
Now please turn to slide nine to see our full year 2020 full financial outlook. Note. This does not include the graphic arts business.
Steve Webster: We expect 2024 sales to be flat or slightly lower than 2023, although better than second half 2023, with the overall market landscape improving as we go through the year. We expect positive overall growth momentum for the gas cylinder business for the full year, although we see softer demand sequentially in quarter one, coming out of an unseasonably strong quarter four 2023. Electron's end markets will gradually improve, although some softness may linger through the first half of 2024. Based on this outlook, we expect adjusted EPS to be in the range of 70 to 85 cents, with the business ramping up towards the middle and latter parts of the year.
We expect 2024 sales to be flat or slightly lower than 2023.
Though better than second half 2023, with the overall market landscape improving as we go through the year.
We expect positive overall growth momentum for the gas cylinder business for the full yet, although we see softer demand sequentially in quarter, one coming out of an unseasonably strong quarter three quarter four 2023.
Elections and markets will gradually improve although some softness may linger through the first half of 2024.
Based on this outlook, we expect adjusted EPS will be in the range of 70 to 85 cents with the business ramping up towards the middle and latter parts of the year.
Steve Webster: Like our sales outlook, our expectation is that earnings will strengthen during the year, with notable improvement as Electrum rebuilds from its depressed Q4 performance. Adjusted EBITDA for the year is anticipated to be in the range of $42 to $46 million, again with a bias towards the latter quarters, with Q1 expected to be similar to Q4 2023. Our exit velocity at the end of 2024, adjusting for seasonality, will be above this range, positioning us to achieve greater EBITDA in 2025. We remain focused on prioritizing a healthy balance sheet and driving strong free cash flow. This enables us to support a balanced approach to capital deployment with the flexibility to invest in future growth and return cash to shareholders, maintaining current levels of dividends and share buyback.
Like our sales outlook, our expectation is that earnings will strengthen during the year with notable improvement as electrum rebuilds from that depressed quarter four performance.
Adjusted EBITDA for the year is anticipated to be in the range of $42 million to $46 million gain with a bias towards the latter quarters with quarter, one expected to be similar to quarter four of 2023.
Our exit velocity at the end of 2024 adjusting for seasonality will be above this range positioning us to achieve greater EBITDA in 2025.
We remained focused on prioritizing our healthy balance sheet and driving strong free cash flow.
This enables us to support a balanced approach to capital deployment with a flexibility to invest in future growth and return cash to shareholders, maintaining current levels of dividends and share buyback.
While we do anticipate an uptick in inventory levels as we prepare for higher revenues working capital management remains important and we expect to generate free cash flow of $20 million to $24 million.
Steve Webster: While we do anticipate an uptick in inventory levels as we prepare for higher revenues, working capital management remains important, and we expect to generate free cash flow of $20 to $24 million. CapEx for the year is projected to be in the range of $11 million to $14 million, compared to $9.4 million in 2023, as we incrementally invest in organic growth projects, including our new production facility to assemble bulk gas systems. We ensure that all such organic growth projects align with our value proposition and with the framework of our strategic review. Before I close, I wanted to address an item reported in our Form 10-K files yesterday regarding the technical statement of material weakness. This relates to the design and operation of certain controls pertaining to the recording of inventory and transit, which affected only balance sheet accounts and had no impact on either the income statement or key performance indicator.
Capex for the year is projected to be in the range of $11 million to $14 million compared to $9 $4 million in 2023 as.
As we incrementally invest in organic growth projects, including a new production facility to assemble bulk gas systems.
We ensure that all such organic growth projects aligned with our value proposition and with the framework of a strategic review.
Before I close I wanted to cover the item reported in our Form 10-K filed yesterday regarding the technical statements of material weakness.
This relates to the design and operation of certain controls pertaining to the recording of inventory in transit, which affected only balance sheet accounts and had no impact on either the income statements all key performance indicators.
We are in the process of designing enhance procedures over inventory in transit, which we're confident will address this area.
Turning to the year ahead, I am optimistic regarding <unk> 2020 for outlook and our market position to capture growth in key end markets, whether it be muted recently.
Steve Webster: We are in the process of designing enhanced procedures for inventory and transit, which we are confident will address this area. Returning to the year ahead, I'm optimistic regarding Luxfer's 2024 outlook and our market position to capture growth in key end markets that have been muted recently. I'm encouraged by the projected demand levels, which gives confidence that we will see volume growth as we emerge from the first quarter into the remainder of the year. This should put us on a trajectory to continue building momentum into 2025 to achieve higher levels of profitability and continue to create value for our shareholders. Now I'd like to turn the call back to Andy. Okay?
Im encouraged by the projected demand levels, which gives us confidence that we will see volume growth as we emerge from the first quarter into the remainder of the year.
This should put us on a trajectory to continue building momentum into 2025 to achieve higher levels of profitability and continue to create value for our shareholders.
Now I'd like to turn the call back to Andy Andy.
Thanks, Steve.
I will conclude my prepared remarks on slide 10.
2023 was a challenging year with several factors, having an adverse impact on our full year results.
The focused actions, we have taken to improve performance and profitability have been effective in turning the corner and we expect to make further progress as we move through 2024.
Throughout this time I've remained extremely proud of our global teams ability to execute through difficult circumstances.
Andy Butcher: Thanks, Steve. I will conclude my prepared remarks on slide 10. 2023 was a challenging year, with several factors having an adverse impact on our full-year results.
As we conclude this update I'd like to highlight again the significant progress we have made over the last few months that gives us confidence in our ability to deliver improved results.
Andy Butcher: The focused actions we have taken to improve performance and profitability have been effective in turning the corner, and we expect to make further progress as we move through 2024. Throughout this time, I've remained extremely proud of our global team's ability to execute through difficult circumstances. As we conclude this update, I'd like to highlight again the significant progress we have made over the last few months that give us confidence in our ability to deliver improved results. Resolving our insurance coverage for the abnormal legal charges that we've been incurring in Electron, eliminating this expense going forward. Completing our two consolidation programs, improving our cost base in both electron and gas cylinders, provided annualized cost savings of $0.9 million and $1.1 million, respectively.
Concluding new commercial arrangements for CBA cylinders recovering our carbon fiber costs, improving margins and restoring profitability.
Capitalizing on the early signs of demand recovery in some of our electronic industrial and transportation sectors with an uptick in orders.
Resolving our insurance coverage for the abnormal legal charges that we've been incurring an electron eliminating this expense going forward.
Completing our two consolidation programs increase improving our cost base in both electronic and gas cylinders provided annualized cost savings of <unk> <unk>.
$9 million and $1 $1 million respectively.
Lastly, reducing our inventories and delivering higher levels of free cash flow and reducing our net debt below $70 million.
The board and I are encouraged by these developments and we enter 2024 with strengthened levels of confidence.
While the industrial macro environment remains uncertain, we are already seeing a rebound in demand for a number of higher margin electronic applications and we are pleased with the recent elevated performance of gas cylinder.
As we continue to navigate the future together, we are following a clear path to value creation solving our customers' challenges with our materials engineering expertise, while improving profitability and margins and maintaining strong levels of cash generation and executing on the outcome of our accelerated strategic review.
Andy Butcher: Lastly, reducing our inventories, delivering higher levels of free cash flow, and reducing our net debt below $70 million. The board and I are encouraged by these developments, and we enter 2024 with strengthened levels of confidence. While the industrial macro-environment remains uncertain, we are already seeing a rebound in demand for a number of higher-margin electron applications, and we are pleased with the recent elevated performance of gas cylinders.
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We are making substantial progress on actions that we expect to unlock shareholder value and gaining confidence that we will return to a path of margin improvement and sustainable earnings growth.
With that I'd.
Like to turn the call back to the operator to begin the Q&A session.
Please go ahead.
At this time the floor is now open for questions.
Andy Butcher: As we continue to navigate the future together, we are following a clear path to value creation, solving our customers' challenges with our materials engineering expertise, while improving profitability and margins, maintaining strong levels of cash generation, and executing on the outcome of our accelerated strategic review. We are making substantial progress on actions that we expect to unlock shareholder value and gaining confidence that we will return Luxfer to a path of margin improvement and sustainable earnings growth. With that, I'd like to turn the call back to the operator to begin the Q&A session. Todd, please go ahead.
You would like to ask a question at this time. Please press star one on your telephone keypad.
You may remove yourself at any time by pressing star two.
Once again Thats star one to ask a question are.
Our first question comes from Steve Farris Zani with Sidoti. Please go ahead.
Good morning, Andy Steve Thanks for the detailed call.
It's been a very very busy quarter and the guidance change indicate you've.
We've taken significant steps to improve profitability going into the new year.
A lot to cover here can we touch on first of this session.
Medifast graphic arts, what went into that with you.
Operator: At this time, the floor is now open for questions. If you would like to ask a question at this time, please press star 1 on your telephone keypad. You may remove yourself at any time by pressing star 2.
Differentiate issues with graphic arts from the rest of electron and then I know probably you can answer it but the timing and why.
Steve Farazani: Once again, that's star number one to ask a question. Our first question comes from Steve Farazani with Sidoti. Please go ahead.
Value of graphic cards could be.
Yes.
Thanks for joining us are Steve a lot of the other questions that and first of all the decision to sell a graphic outs and why and why it no longer fits with our portfolio.
Andy Butcher: Morning, Andy, and Steve, thanks for the detailed call. Obviously, it's been a very, very busy quarter, and the guidance would seem to indicate you've taken significant steps to improve profitability going into the new year. A lot to cover here. Can we touch first on the decision to divest Graphic Arts? What went into that? What differentiates the issues with Graphic Arts from the rest of Electron?
We originally pet.
Purchased that business see if I can 2003, when it traded as magnesium Elektron North America and at that time, we envisaged it says.
High volume aerospace and automotive supplier.
Increasingly of course, the business opportunity grew in graphic arts, very successfully but moving more and more away from electrons core competence in materials technology and and alloys. So we think that now graphic arts will do better under I guess under a new owner.
Andy Butcher: And then I know you probably can't answer it, but timing and what the value of Graphic Arts could be. Thanks for joining us, Steve. A lot of questions there. First of all, the decision to sell Graphic Arts and why it no longer fits with our portfolio. We originally purchased that business, Steve, back in 2003 when it was trading as Magnesium Electron North America, and at that time, we envisaged it as a high volume aerospace and automotive supplier. Increasingly, of course, the business opportunity grew in graphic arts, very successfully, but moving more and more away from Electron's core competence in materials technology and alloys.
No doubt by the upcoming lower magnesium cost, which should provide higher levels of profitability.
And frankly I'm excited that the successful sale of that business will receive released results to the rest of Luxor.
Results in both time and money for us to deploy on some of our core organic opportunities elsewhere in the business materials technology light weighting clean energy.
Andy Butcher: So, we think that now, Graphic Arts will do better under a new owner, helped, no doubt, by the upcoming lower magnesium costs, which should provide higher levels of profitability. And frankly, I'm excited that the successful sale of that business will release resources to the rest of Luxfer. Resources in both time and money for us to deploy on some of our core organic opportunities elsewhere in the business. Materials Technology, Lightweighting, Clean Energy. In terms of timing, I can answer that.
In terms of in terms of timing and I can't answer that we're aiming for a completion in 2024.
We've done to date with the help of excess capital partners suggest that this is a this is achievable.
As you suspected I, probably wouldn't want to discuss the transaction price, but I would note. The inventory is currently valued at around $17 billion and the business operates with substantial although somewhat aged capital assets.
We are just initiating the process, we're going to be running a comprehensive process to ensure we deliver the very best outcome.
Andy Butcher: We're aiming for completion in 2024. The work we've done to date with the help of XMS Capital Partners suggests that this is achievable. As you suspected, I probably wouldn't want to discuss the transaction price, but I would note the inventory is currently valued at around $17 million, and the business operates with substantial, although somewhat aged, capital assets.
Look this is a good business delivering quality products led by a strong team with some significant assets. We don't doubt there is a good buyer out there for the business.
Yeah.
Very helpful. Thanks, Thanks for covering all that just I guess a question for Steve.
You're guiding without it are you going to be able to include this include discontinued operations moving forward what would what would.
Be necessary to predicate that.
Steve Farazani: We're just initiating the process. We're going to be running a comprehensive process to ensure we deliver the very best outcome. Look, this is a good business, delivering quality products, led by a strong team, with some significant assets. We don't doubt there is a good buyer out there for the business.
Yes, there's some technical accounting, there, Steve, which I won't go into but it doesn't quite meet your criteria in terms of size a strategic.
Strategic shifts et cetera to be a discontinued operation what we will be doing from quarter. One is classified as available for sale held for sale.
Steve Webster: Thanks for covering all that. Just, I guess, a question for Steve, since you're guiding without it, are you going to be able to include this into discontinued operations moving forward? Or what would be necessary to predicate that?
Then we will as you've seen with these results continue to adjust our graphic arts from our ongoing results as I have on the guidance.
Reflecting that it is no longer strategically part of Oxford.
Sure. Thanks, so much Steve.
Steve Webster: Yeah, there's some technical accounting there, Steve, which I won't go into, but it doesn't quite meet the criteria in terms of size, strategic shift, etc. to be a discontinued operation. What we will be doing from quarter one is classifying it as available for sale, held for sale, and then we will, as you've seen with these results, continue to adjust out Graphic Arts from our ongoing results, as I have on the guidance, reflecting that it is no longer a strategic part of Luxfer Holdings. Thanks, Steve.
If I could shift here Sean.
Very very strong performance for gas cylinders, just trying to walk through the pieces a little bit on the CPA agreements and how much.
Okay.
Part of that.
You get the full benefit of the new agreements in the quarter. Because this is your highest margin for that business.
Quite some time, so I'm trying to mix the much stronger volume firsthand.
The benefits from the new agreements and also I think you mentioned Q1 will be soft roster, particularly strong volume quarter can you just sort of walk through the pieces of that margin and how you're thinking about that moving forward.
Andy Butcher: If I could shift gears onto very, very strong performance for gas cylinders, just trying to walk through the pieces a little bit on the SCBA agreements and how much they were a part of that. Did you get the full benefit of the new agreements in the quarter because this is your highest margin for that business in quite some time? So I'm trying to balance the much stronger volume versus the benefits from the new agreements. And also, I think you mentioned Q1 will be softer after a particularly strong volume quarter. Can you just sort of walk through the pieces of that margin and how you're thinking about that moving forward?
Yes pleased to do to do that.
Steve we are very proud to be a leading supplier into that five Pfizer CPA markets and to be able to provide a lightweight high pressure cylinders into what is a very important life saving application and so on and so yes. We are very pleased stutz flex the gas cylinders in that two largest customers of recently formula.
Formalize these new multi year supply agreements.
As part of this like say gasoline does it's been able to make the necessary adjustments related to cost increases those did take effect from October let's start with Q4 2023, and those adjustments will now be executed on a quarterly basis going up going forward.
Andy Butcher: Yes, I'm pleased to do that. Steve, we're very proud to be a leading supplier to the firefighter SCBA market and to be able to provide our lightweight high-pressure cylinders for what is a very important life-saving application. And so, yes, we're very pleased that Luxfer Gas Cylinders and their two largest customers have recently formalized these new multi-year supply agreements. As part of this, Lexford Gas Cylinders has been able to make the necessary adjustments related to cost increases.
Quarter four was also a very strong period for demand in our CPA cylinders and we're really pleased with the way the likes of operations in Riverside stepped up to us to address that.
Products for firefighters have been the bedrock of the cylinder business over the last 20 years.
It's and intend very important for our customers businesses. So we're very very satisfied that these agreements now in place with the associated supply continuity.
Andy Butcher: These did take effect from October, at the start of Q4 2023, and those adjustments will now be executed on a quarterly basis going forward. Quarter 4 was also a very strong period for demand for SCBA cylinders, and we're really pleased with the way the Luxfer operations in Riverside stepped up to address that. Products for firefighters have been a bedrock of the cylinder business over the last twenty years and, in turn, very important for our customers' businesses, so we're very, very satisfied that these agreements are now in place with the associated supply continuity. Thanks for that, Steve.
Excellent thanks for that Steve.
And I think about I think.
If I may have a language wrong here, but gradual improvement in elektron can you talk about.
Strengthening versus not strengthening end markets for your electronic Fareed electronic businesses and also.
Timing of seeing some of this additional magnesium supply I would assume lower cost how that can influence.
Okay.
Affect margins just from go through the year and <unk> 25.
Yes, so manganese magnesium supply is obviously an important part of the elektron business.
Steve Farazani: When I think about, I may have the language wrong here, but gradual improvement in electron, can you talk about strengthening versus not strengthening end markets for your electronic, varied electron businesses. And also, timing of seeing some of this additional magnesium supply, I would assume lower cost, how that can affect margins as we go through the year and into 2025. Yes, so magnesium supply is obviously an important part of the electron business. And you'll recall that the US magnesium plant has been offline since late 2022 for some major maintenance and capital engineering work. We do maintain a regular dialogue with them, but the timeline for a restart is still a little unclear.
Youll recall that the U S magnesium plants has been offline since.
Later in 2022 for some major maintenance and capital engineering work.
We do maintain a regular dialogue with them about the timeline for a restart is still a little unclear.
The overall landscape for magnesium supply has improved though especially over the last six months. So some of the supply chains even out.
And we have proactively developed and approved some alternative suppliers and <unk> and in <unk>.
2024, we've bought another one of those online, which you said which is beneficial.
So, yes, well magnesium pricing is still up from historic levels. It is considerably lower than we saw at the peak in 2022 and as we worked through our inventory as quickly as we can we will see lower overall costs, which will be which will be helpful.
Andy Butcher: The overall landscape for magnesium supply has improved, though, especially over the last six months as some of the supply chains even out, and we've proactively developed and approved some alternative suppliers. And in and in twenty twenty four, we've bought another one of those online, which is, which is beneficial. So, yes, while magnesium pricing is still up from historic levels, it's considerably lower than we saw at the peak in 2022. And as we work through our inventory as quickly as we can, we will see lower overall costs, which will be helpful as we seek to rebuild demand in the electron segment. And we do think that quarter four represents a low mark for electron sales last year, and we'd flag some lower sales of products such as military meals ready to eat and flameless Russian heaters.
As we seek to repack rebuild demand in the electrical segment.
And we do think that's a quarter four represents a low mark for for Elektron lost last year, and we had flagged some lower sales of.
Products such as our.
Military meals ready to eat Flameless, Russian heaters, and we're already seeing that so demands coming back into in quarter, one and some some further strengthening and electron in quarter, two and some of the general industrial and transportation products so difficult.
A difficult Q4 photo for electronic and they are increasingly bright to period ahead.
Thank you at this time I'll now turn the call back to CEO, Andy but to you for final remarks.
Andy Butcher: And we're already seeing that demand coming back in quarter one and some further strengthening in electrons in quarter two in some of the general industrial and transportation products. So a difficult Q4 for electrons and an increasingly brighter period ahead. Thank you.
Well. Thank you for the questions, Steve and thank you to everyone for joining the <unk> call today.
We are entering 2020 full with favorable momentum as the structural changes to our operations improve our cost base and strategic pricing drive sustainable margin improvements and the definitive directions from our strategic review process gives us the opportunity to further unlock shareholder value.
Andy Butcher: At this time, I'll now turn the call back to CEO Andy Butcher for final remarks. Well, thank you for the questions, Steve, and thank you to everyone for joining the Luxfer Call today. We are entering 2024 with favourable momentum, as the structural changes to our operations improve our cost base, our strategic pricing drives sustainable margin improvements, and the definitive directions from our strategic review process give us the opportunity to further unlock shareholder value. I'm really very pleased with the work on the strategic review process and I look forward to discussing those three elements with you further in the quarters ahead, the disposal of the graphic arts business, the improved performance that we will see in gas cylinder I hope that, like me, you are excited about the prospects for 2024.
I'm really very pleased with the work on the strategic review process.
Look forward to discussing those three elements with you further in the.
In the quarters ahead, the disposal of the <unk> business.
The improved performance that we will we will see in gas cylinders and electron as we deliver profitable growth and the optionality that we now have in our in our portfolio.
I Hope Thats like me you were excited about the prospects for 2024.
Before I conclude I'd like to mention that we will be attending the Roth conference on March 19th in Dana point, California.
In addition, we will also be attending numerous other competencies throughout the year and I hope to have the opportunity to connect with many of you soon.
Andy Butcher: Before I conclude, I'd like to mention that we will be attending the Roth Conference on March 19th in Dana Point, California. In addition, we will also be attending numerous other conferences throughout the year, and I hope to have the opportunity to connect with many of you soon. As always, thank you for your interest and support in Luxfer. We look forward to updating you on our progress next quarter. This concludes Luxfer's Q4 2023 earnings call. A recording of this conference call will be available in about two hours. A link to a recording of this webcast will be available on the Luxfer website at www.luxfer.com. You may now disconnect. Have a wonderful day! www.LuxferHoldings.com www.larryweaver.com
As always thank you for your interest and support in <unk>.
We look forward to updating you on our progress next quarter.
This concludes Lux routes Q4 2023 earnings call.
A recording of this conference call will be available in about two hours.
A link to a recording of this webcast will be available on the Luxor website at www Dot Lux for Dot com.
You may now disconnect and have a wonderful day.
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