Q3 2024 Luxfer Holdings PLC Earnings Call

Speaker Change: We'll be back!

Speaker Change: Please stand by, we're about to begin.

Beau: Good morning, ladies and gentlemen. My name is Beau, and I will be your conference operator today. Welcome, everyone, to Luxfer's third quarter 2024 earnings conference call. All lines have been placed on mute. After the speaker's prepared remarks, we will hold a question and answer session.

Beau: Now at this time, I'll turn things over to Kevin Grant, Vice President of Investor Relations and Business Development at Luxfer. Kevin, please go ahead.

Kevin Grant: Thank you, Bo, and good morning, everyone. Welcome to Luxford's third quarter 2024 earnings conference call. This morning, we'll be reviewing Luxford's financial results for the third quarter and its September 30th, 2024. I'm pleased to be joined today by Andy Butcher, our chief executive officer, and Steve Webster, our chief financial officer.

Kevin Grant: Today's webcast is accompanied by a presentation that can be accessed at Luxford.com. Please note any references to non-GAAP financials are reconciled in the appendix of the presentation.

Kevin Grant: 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 obligations to update any forward-looking statements, whether as a result of new information, future events, or otherwise.

Kevin Grant: Please refer to the Safe Harbor statement on slide 2 of today's presentation for further details.

Kevin Grant: During today's call, we'll be providing adjusted third quarter 2024 financial results excluding the graphic arts business, legal recoveries and expenses for both 2024 and 2023. Now let me introduce CEO of Luxor, Andy Butcher.

Speaker Change: Please turn to slide 3. Andy, please go ahead.

Andy Butcher: Thank you, Kevin, and good morning, everyone. Thank you for joining us.

Andy Butcher: In the third quarter, the Luxfer team continued to build on the positive momentum we've established throughout this year, achieving steady revenue improvements and enhancing profitability.

Andy Butcher: We sustain strong operational efficiency while capitalizing on some improved market conditions demonstrating the quality and adaptability of our organization.

Andy Butcher: I'm also pleased to announce the sale of the Lakehurst, New Jersey property for $7.3 million.

Andy Butcher: Our sales for the third quarter came in at $91.4 million, representing a 1.2% increase year over year. This was supported by the demand in our defence, first response and healthcare sectors, particularly in the Meals Ready to Eat and the Defence Powders product lines.

Andy Butcher: Additionally, we took advantage of a tactical shift from several customers who expedited their orders into the third quarter from the fourth, driven by prospects of potential hurricanes and port strikes.

Andy Butcher: This contributed to the strong Q3 performance, yielding higher than anticipated sales volumes and further supporting margin improvements.

Andy Butcher: In terms of profitability, we achieved an adjusted EBITDA of $13.5 million, which is a 22.7% improvement over last year.

Andy Butcher: We also generated our third consecutive quarter of adjusted EBITDA margin growth, reaching 14.8%.

Andy Butcher: This result was driven by our ongoing cost reduction and operational efficiency efforts.

Andy Butcher: So, as we approach the closing months of 2024, we are notably encouraged.

Andy Butcher: The progress we have made in the first three quarters puts us on track to deliver an elevated full-year 2024 guidance, and we anticipate that our focus on operational efficiencies and strategic investments sets a firm foundation into 2025.

Andy Butcher: We are well positioned to navigate market challenges and to make the most of emerging opportunities as they develop. I am pleased with our recent progress.

Andy Butcher: Now, let's turn to slide 4 for a quick update on our comprehensive strategic review with a specific focus on the divestiture of the graphic arts business.

Andy Butcher: The sale of Graphic Arts is now expected to close in the first half of 2025.

Andy Butcher: The business has been making good progress in turning towards profitability and generating cash, although the originally identified buyer did not meet our valuation expectations and we are now engaged with other interested parties.

Andy Butcher: We remain fully committed to securing the best possible outcome for Luxfer and our shareholders in a timely manner.

Andy Butcher: Meanwhile, we continue enhancing our gas cylinders and electron segments by reducing costs and executing profitable growth opportunities driven by innovation and strategic investments.

Andy Butcher: The advancements we made this year have been encouraging.

Andy Butcher: We also remain attentive in assessing market conditions to maximize future shareholder value.

Speaker Change: At this point, I'll turn the call over to Steve to provide a deeper dive into our financial results and the updated full year guidance for 2024.

Speaker Change: Steve? Steve?

Steve Webster: Thanks, Andy, and good morning, everyone. I'd like to start by reviewing our consolidated financial results and bridges for the third quarter of 2024.

Steve Webster: Please note that the non-GAAP numbers I referred to are on an adjusted basis, excluding the graphic arts business and excluding the legal recoveries or expenses from 2024 and 2023 comparisons.

Steve Webster: Now let's turn to slide 5.

Steve Webster: Our adjusted EBITDA came in at $13.5 million, with margins of 14.8%, showing a sequential improvement of 150 basis points.

Steve Webster: Adjusted earnings per share rose to 27 cents, up 35% year-over-year, highlighting our improved profitability driven by both the restructuring initiatives and effective cost management.

Steve Webster: Cash flow from operations remained robust at $12.8 million and our free cash flow totaled $9.3 million, demonstrating our disciplined approach to capital management.

Steve Webster: We ended the quarter with net debt reduced to $66 million, further strengthening our balance sheet, with leverage improving to approximately 1.3 times excluding graphic arts.

Steve Webster: Looking at the sales bridge, our revenue for the third quarter was $91.4 million, compared to $90.3 million in the same period last year.

Steve Webster: This increase was primarily driven by a $1.6 million foreign exchange tailwind and a $0.3 million net contribution from price adjustments.

Steve Webster: Note that we continue to benefit from increases in gas cylinders, largely offset by pricing reductions in our electron segment, as we pass through lower input costs.

Steve Webster: We also experienced a $0.8 million impact from lower volumes with improvements in electron offset by declines in gas cylinders.

Steve Webster: Now turning to the profit bridge, our third quarter adjusted EBITDA was $13.5 million, up from $11 million in Q3 of last year.

Steve Webster: This improvement included a $1.5 million boost from net deflation, primarily related to lower magnesium costs.

Steve Webster: We also benefited from improved volume mix and the positive impact of price adjustments.

Steve Webster: Given the relatively modest increase in sales, we were especially pleased by the significant improvement in our adjusted EBITDA margin, which rose by 260 basis points over the prior year, adding approximately $2.5 million to our bottom line.

Steve Webster: Now let's turn to slide 6 for a detailed review of Electron's third quarter financial results.

Steve Webster: In the third quarter, Electron delivered a strong rebound in revenues and continued improvement in profitability.

Steve Webster: Sales were 48.8 million, up 7% year over year, and 16.2% sequentially.

Steve Webster: This reflected a strong recovery in defence sales, although also pulled forward by some customers in anticipation of both the port strikes and the hurricane season.

Steve Webster: This marks our third consecutive quarter of margin growth, demonstrating ongoing efficiency gains.

Steve Webster: Demand was particularly strong in defence first response and healthcare with notable contributions from magnesium powders and meals ready to eat markets.

Steve Webster: Transportation markets benefited from stronger Rotamag sales, offsetting weaker autocatalysis performance, while general industrial segments appeared to be in the early stages of a gradual recovery.

Steve Webster: Electron's results underscore the success of our focus on efficiency, innovation and resilience.

Speaker Change: Now let's turn to slide 7 for a detailed review of Gaslunder's third quarter financial results.

Speaker Change: Gas Cylinders performance for the quarter was resilient despite some headwinds.

Speaker Change: Sales were $42.6 million, reflecting a 4.7% decrease year-over-year, but demonstrating stability with more normal levels of SCBA sales. Indeed, year-to-date sales are up, following strong SCBA performance in the first half.

Speaker Change: The 450 basis point margin improvement was primarily driven by the benefit of new long-term pricing contracts established at the end of 2023, as well as tailwinds from the partial closure of the Pomona, California operation.

Speaker Change: In terms of market performance, the Defence First Response and Healthcare segment experienced lower sales in the quarter due to the timing of SCBA projects, though healthcare demand remained steady.

Speaker Change: We also saw encouraging signs of growth in the European industrial market, driving stronger demand for our cylinders.

Speaker Change: Transportation, while slower than initially anticipated in the quarter, remains steady on a year-to-date basis.

Speaker Change: Overall, the gas cylinder segment is showing stability, and year-to-date is benefiting considerably from the new long-term pricing agreements, as well as from efficiency gains. We are confident that our strategic growth initiatives, especially in the area of clean energy, will drive long-term future revenue and profitability increases.

Speaker Change: Now please turn to slide 8 for an update on our full year 2024 financial guidance.

Speaker Change: As a reminder, our 2024 guidance excludes the graphic arts business.

Speaker Change: This quarter we've added an additional level of granularity by presenting guidance for adjusted EBITDA and adjusted diluted EPS, both with and without the impact of non-recurring legal cost recoveries, providing a clearer view of our core operations.

Speaker Change: Excluding legal cost recoveries, our increased guidance for adjusted EBITDA is now between $45 million and $47 million. Therefore, we increased our adjusted diluted EPS to a higher range of 88 to 94 cents.

Speaker Change: Including legal cost recoveries, our outlook is even higher. We now anticipate adjusted EBITDA to be between $52 million and $54 million, with adjusted diluted EPS ranging from $1.09 to $1.14.

Speaker Change: Turning specifically to free cash flow, we expect to be between $35 million and $37 million. Our updated free cash flow range includes the benefits of improved business performance, legal fee recoveries, and the net proceeds from the Lakehurst, New Jersey, land sale received in early October.

Speaker Change: So, with these sales proceeds and ongoing working capsule improvements, we anticipate our net debt to EBITDA ratio will decrease to approximately 1.1 times.

Speaker Change: These improvements underline our ongoing commitment to maintaining a robust balance sheet and enhancing our free cash flow.

Speaker Change: This financial stability supports our strategic initiatives, allowing for thoughtful continued investment in growth opportunities, while also paying down debt and returning capital to shareholders.

Speaker Change: Now I'd like to turn the call back to Andy. Andy?

Andy Butcher: Thanks Steve. I now want to take some time with you to again highlight some of the innovations that will help drive Luxfer to future sustainable growth.

Andy Butcher: Please turn to slide 9.

Andy Butcher: Our focus is on achieving long-term growth through innovation and product development, which is a key segment of the Luxor business system.

Andy Butcher: You will remember that the business system is the foundation of our strategy for delivering sustainable value and achieving customer growth.

Andy Butcher: Last quarter, we shared our enthusiasm for the long-term strategic opportunities with our clean energy products and our intent to drive growth in the CNG and hydrogen sectors.

Andy Butcher: We remain confident in the significant potential here, especially in CNG and bulk gas transportation, although that transition is happening over time alongside electrification and other impactful trends.

Andy Butcher: I would characterize our expectations as being for steady growth rather than for an immediate surge in sales during 2025.

Andy Butcher: In our next call though, I expect to be able to announce the shipment of the first modules from our new Nottingham Bolt Gas facility.

Andy Butcher: For today, I want to spotlight three smaller product ranges that represent our commitments to growth and innovation. Rotamag Alloy, L7x Medical Cylinders and our expanded and updated Heater Meals Portfolio.

Andy Butcher: First, Rotamag.

Andy Butcher: Sales have grown 30% per annum over the last five years, driven by the rapid adoption of Rotamag as an added value option in lightweight, high-performance automotive materials.

Andy Butcher: This growth underscores the automotive market's increasing demand for advanced materials that boost performance, fuel efficiency and sustainability.

Andy Butcher: Second, our L7x medical cylinders provide a lightweight solution for efficient oxygen delivery.

Andy Butcher: With secured orders from key healthcare and industrial partners, this product has achieved global adoption, delivering significant cost savings in logistics and refills.

Andy Butcher: This success has notably strengthened our market presence, with L7X sales more than doubling from 2022 to 2024.

Andy Butcher: Third, our Heater Meals portfolio was revamped last year to add new menus and easy-to-use packaging supported by a simpler and more responsive supply chain.

Andy Butcher: These new mails were supplied into the market and stored in strategic inventories in significant quantities in Q2 and especially in Q3, ahead of what was expected to be a busier than normal hurricane season.

Andy Butcher: This has enabled Luxor Magtech Solutions to play an important role in recent hurricane disaster relief efforts, and I am proud of our team's work in ensuring that those affected and in need have been able to access warm meals.

Andy Butcher: These innovations are indicative of our commitment to focus on sustainable, long-term growth.

Andy Butcher: Now please turn to slide 10.

Andy Butcher: This quarter, we are pleased to reiterate five key perspectives.

Andy Butcher: Growth in Key Markets

Andy Butcher: We achieved strong improvements in both sales and profitability in Q3, driven primarily by demand for meals ready to eat, defence powders and Rotamag.

Andy Butcher: Thank you for joining us. I'm Andrew Butcher.

Andy Butcher: Our strong balance sheet and elevated free cash flow, which totaled $9.3 million, have enabled us to continue supporting growth investments while reducing debt and returning capital to shareholders.

Andy Butcher: Maintaining financial stability remains important and our leverage ratio stands at a low 1.3 times.

Andy Butcher: Operational excellence. A continued focus on streamlining processes and enhancing operational efficiency has led to margin improvements for the third consecutive quarter with adjusted EBITDA margins now reaching 14.8 percent.

Andy Butcher: This reflects our disciplined approach to cost control and restructuring efforts.

Andy Butcher: Driving Clean Energy Initiatives

Andy Butcher: We're advancing our CNG and bulk gas transportation projects, laying the groundwork for future growth in renewable energy markets as we look towards 2025 and beyond.

Andy Butcher: Well, we expect this growth to be gradual. Our ongoing innovations position us well for long-term success in the clean energy space.

Andy Butcher: And last, strategic alignments.

Andy Butcher: The sale of the Graphic Arts business is moving forward, with an expected close in the first half of 2025.

Andy Butcher: This transaction will allow us to sharpen our focus on core growth areas, ensuring alignment with our long-term strategic vision.

Andy Butcher: These highlights demonstrate our ability to capitalize on key opportunities and maintain a steady progress as we approach 2025.

Andy Butcher: With that, I'd like to turn the call back to the operator for the question and answer session.

Speaker Change: Bo, please go ahead.

Speaker Change: Thank you, Mr. Butcher. Ladies and gentlemen, at this time, if you do have any questions or comments, simply press star 1, and if you find your question has been addressed, you may remove yourself from the queue by pressing star 2. Once again, star 1, please.

Speaker Change: And we'll go first this morning to Steve Farazani at Sidoti.

Speaker Change: Thank you for watching!

Steve Farazani: Morning, Andy. Morning, Steve. Thanks for covering the highlights on the quarter. I wanted to start with asking about the impressive margins in Electron. I'm trying to get a sense of are we getting close to what you think are

Steve Farazani: What do you think are sustainable margins there? What I'm asking is...

Steve Farazani: Is that all your lower-cost magnesium that's now passing through the income statement or is there still higher-cost magnesium that you're working through? Is this more of a sustainable margin and how much did it benefit from the pull forward?

Andy Butcher: Thanks Steve. This is Andy. Yes, we were pleased with the continued improvement in the margins in Electron, and that's been helped by some improved product mixes as well. I'll perhaps ask Steve Webster to provide a little bit of colour.

Steve Webster: Normally we would have thought sort of 20% if you if you go back a couple of years was an electoral margin We would aspire to so we're not quite there yet, but clearly we're a little bit lower I guess on the on the revenues and the volumes there's still some recovery to come back Which I think could get us close to that 20% in future

Speaker Change: Thank you.

Speaker Change: I want to ask about the other surprise to me was the strength in your European sales because when I looked at the queue, it looks like you were up in every major European market on the industrial side. That seems a little counterintuitive. Can you talk a little bit about what's going on in Europe and what's driving that growth?

Speaker Change: We've also seen some stronger performance in some of the traditional lines in Europe. So yes, that was an improved area for us in the quarter, Steve.

Steve Webster: Can you touch on where you are with the new UK facility? Is that producing yet? And also, make it a bigger question, can you talk about, you said gradual a lot with that, with the

Steve Webster: the CNG engines. Can you talk about what you're seeing so far with the new engine that's now being produced?

Speaker Change: Yeah, let me talk to both of those. So, first of all, the Nottingham Bulk Gas Transportation Module facility. The first module is going through final assembly. It's looking good and we're looking forward to seeing it in the field with our first customer. That'll be in the UK at the end of the year.

Speaker Change: So I do think that transportation of hydrogen is going to be a really important link in the green hydrogen chain.

Speaker Change: and pleased to be providing that lightweight, high-capacity product into the market. So that's on track, and we'll see that slowly but steadily ramp up as we go through 2025.

Speaker Change: You also asked about the C&G market, and you mentioned the North American product, the new C&G engine that's coming out to support that. We're seeing some initial fleet customer orders coming through now at a prototype trial level, with some interest in some follow-on larger orders.

Speaker Change: Now the manufacturing of the engine is only just starting to ramp up now and that's planned to go on through 2025.

Speaker Change: So, I think some of the recent forecasts are maybe a little bit more measured now for 2025 than the earlier higher levels, but we should see a good ramp there going on maybe in the middle of next year.

Speaker Change: You think primarily it's it's testing right now so these are going to be slower initial orders then with success you see the ramp later is that sort of what I'm hearing?

Speaker Change: Yes, we've got some, you'll remember we preloaded the system with some good amounts of inventory and I think that's starting to get drawn down now by these prototype trial levels.

Speaker Change: But I'm certainly not expecting any significant impact for us on Quarter 4, and maybe even not in Quarter 1. But certainly as we get into the middle of next year, I'm looking for that to...

Speaker Change: Really really moved the needle in terms of the adoption of CNG in North America

Speaker Change: where the conversations are and why you would have confidence you can close it in the first half of next year.

Speaker Change: Yeah I'll take that Steve. Yeah so first half of next year is now our aim. We had said previously we we hope to be able to do it by the end of this year.

Speaker Change: I mean, we were working on an exclusive basis with a single buyer. Ultimately, we're looking for a fair price for our shareholders, and also sensible warranties are also important in any deal, and we don't want to rush a transaction.

Speaker Change: We've got a number of parties who are interested, some of which we were already engaged with previously before we chose to go exclusive. So some of those parties have already done a reasonable amount of work.

Speaker Change: Andrew Butcher, Andrew Butcher, Kevin Grant

Steve Farazani: Thanks a lot, Steve. Thanks, Andy.

Speaker Change: Thank you and it appears we have no further questions today. Mr. Butcher, I'd like to turn things back to you for any closing comments.

Speaker Change: Thank you, Bo, and thank you for the question, Steve.

Andy Butcher: In closing, I think I want to emphasise how proud we are of the progress that Lux has made this year, and especially the performance in the third quarter. The foundation that we've laid with sequential growth in profitability...

Speaker Change: Strengthened Operational Efficiencies, Strategic Investments in Clean Energy

Speaker Change: mean we're not just now responding to market challenges, we're actively driving our future. Our balance sheet is stronger, our focus sharper, our opportunities are promising.

Speaker Change: We're excited about the future and remain committed to maximising value for our shareholders.

Speaker Change: Thank you for your continued support and confidence in Luxfer. We look forward to updating you next quarter.

Speaker Change: Thank you. This does conclude Luxfer's Q3 2024 earnings call. A recording of this conference will be available in about two hours. A link to the recording of this webcast will be available on Luxfer's website at www.luxfer.com. Again, thanks so much for joining us everyone and we wish you all a great day. Goodbye.

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