Luxfer Holdings (LXFR) Q3 2024 earnings call transcript

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. 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.

Thank you, Beau, and good morning, everyone. Welcome to LUXFER's third quarter 2024 earnings conference call. This morning, we'll be reviewing LUXFER's financial results for the third quarter ended September 30, 2024. I'm pleased to be joined today by Andy Butcher, our Chief Executive Officer, and Steve Webster, our Chief Financial Officer. Today's webcast is accompanied by a presentation that can be accessed at LUXFER. com. Please note any references to non-GAAP financials are reconciled in the appendix of the presentation.

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. Please refer to the safe harbor statement on slide two of today's presentation for further details.

During today's call, we will 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 LUXFER, Andy Butcher. Please turn to slide three. Andy, please go ahead.

Thank you, Kevin, and good morning, everyone. Thank you for joining us. 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. We sustained strong operational efficiency while capitalizing on some improved market conditions, demonstrating the quality and adaptability of our organization. I am also pleased to announce the sale of the Lakehurst, New Jersey property for $7.3 million.

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. 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.

This contributed to the strong Q3 performance, yielding higher than anticipated sales volumes and further supporting margin improvements. In terms of profitability, we achieved an adjusted EBITDA of $13.5 million, which is a 22.7% improvement over last year. We also generated our third consecutive quarter of adjusted EBITDA margin growth, reaching 14.8%. This result was driven by our ongoing cost reduction and operational efficiency efforts. Our operating cash flow for the quarter was $12.8 million, which further contributed to maintaining our strong balance sheet and reducing our net leverage to 1.3 times.

So, as we approach the closing months of 2024, we are notably encouraged. 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. 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. Now let turn to slide four for a quick update on our comprehensive strategic review I a specific focus on the divestiture of the graphic arts business The sale of graphic arts is now expected to close in the first half of 2025 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. We remain fully committed to securing the best possible outcome for LUXFER and our shareholders in a timely manner.

Meanwhile, we continue enhancing our gas cylinders and electron segments by reducing costs and executing profitable growth opportunities driven by innovation and strategic investments. The advancements we made this year have been encouraging. We also remain attentive in assessing market conditions to maximise future shareholder value.

At this point, I will turn the call over to Steve to provide a deeper dive into our financial results and the updated full-year guidance for 2024. Steve?

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

Now let's turn to slide 5. In the third quarter, we delivered impressive results. Sales were $91.4 million, and gross profit was $20.7 million, resulting in a gross margin of 22.6%, reflecting lower input costs and a favorable sales mix.

Our adjusted EBITDA came in at $13.5 million, with margins of 14.8%, showing a sequential improvement of 150 basis points. Adjusted earnings per share rose to $0.27, up 35% year-over-year, highlighting our improved profitability driven by both the restructuring initiatives and effective cost management.

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. 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.

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

We also experienced a $0.8 million impact from lower volumes, with improvements in electron offset by declines in gas cylinders. Now turning to the profit bridge, our third quarter adjusted EBITDA was $13.5 million, up from $11 million in Q3 of last year. This improvement included a $1.5 million boost from net deflation, primarily related to lower magnesium costs. We also benefited from improved volume mix and the positive impact of price adjustments. 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.

Now let's turn to slide 6 for a detailed review of Electron's third quarter financial results. In the third quarter, Electron delivered a strong rebound in revenues and continued improvements in profitability. Sales were 48.8 million, up 7% year over year and 16.2% sequentially. 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. Adjusted EBITDA was $8.9 million, with a margin of 18.2%, reflecting year-over-year gains supported by favorable pricing and operational improvements.

This marks our third consecutive quarter of margin growth, demonstrating ongoing efficiency gains. Demand was particularly strong in defense first response and healthcare, with notable contributions from magnesium powders and meals-ready-to-eat markets. Transportation markets benefited from stronger Rotomag sales, offsetting weaker autocatalysis performance, while general industrial segments appear to be in the early stages of a gradual recovery. Electron's results underscore the success of our focus on efficiency, innovation, and resilience.

Now let's turn to slide 7 for a detailed review of Gas Cylinder's third quarter financial results. Gas cylinders' performance for the quarter was resilient, despite some headwinds. 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. Adjusted EBITDA reached $4.6 million, representing a 64.3% year-over-year increase, with margins at 10.8%. 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. 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.

We also saw encouraging signs of growth in the European industrial market, driving stronger demand for our cylinders. Transportation, while slower than initially anticipated in the quarter, remained steady on a year-to-date basis. Overall, the gas cylinders 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.

Now, please turn to slide 8 for an update on our full-year 2024 financial guidance. As a reminder, our 2024 guidance excludes the graphic arts business. 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. Excluding legal cost recoveries our increased guidance for adjusted EBITDA is now between million and million Therefore we increased our adjusted diluted EPS to a higher range of to Including legal cost recoveries our outlook is even higher We now anticipate adjusted EBITDA to be between million and million with adjusted diluted EPS ranging from to Turning specifically to free cash flow, we expect to be between $35 million and $37 million.

Our updated free cash flow range includes the benefit of improved business performance, legal fee recoveries, and the net proceeds from the Lakehurst, New Jersey land sale received in early October. So, with these sales proceeds and ongoing working capital improvements, we anticipate our net debt to EBITDA ratio will decrease to approximately 1.1 times.

These improvements underline our ongoing commitment to maintaining a robust balance sheet and enhancing our free cash flow. NIST Financial Stability supports our strategic initiatives, allowing for thoughtful continued investment in growth opportunities, while also paying down debt and returning capital to shareholders. Now I'd like to turn the call back to Andy. Andy.

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. Please turn to slide nine. Our focus is on achieving long-term growth through innovation and products development, which is a key segment of the LUXFER business system. You will remember that the business system is the foundation of our strategy for delivering sustainable value and achieving customer growth.

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. 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. I would characterise our expectations as being for steady growth rather than for an immediate surge in sales during 2025. In our next call though, I expect to be able to announce the shipment of the first modules from our new Nottingham Volt Gas facility.

For today, I want to spotlight three smaller product ranges that represent our commitment to growth and innovation. Rotomag alloy, L7X medical cylinders, and our expanded and updated heater meals portfolio.

First, Rotomag. Sales have grown 30% per annum over the last five years, driven by the rapid adoption of Rotomag as an added value option in lightweight, high-performance automotive materials. This growth underscores the automotive market's increasing demand for advanced materials that boost performance, fuel efficiency, and sustainability.

Second, our L7X medical cylinders provide a lightweight solution for efficient oxygen delivery. With secured orders from key healthcare and industrial partners, this product has achieved global adoption, delivering significant cost savings in logistics and refills. This success has notably strengthened our market presence, with L7X sales more than doubling from 2022 to 2024.

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. These new meals 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. This has enabled LUXFER 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.

Product developments such as these are key features of our strategy to drive profitable growth and create value under the LUXFER business system. These innovations are indicative of our commitment to focus on sustainable long-term growth. Now please turn to slide 10. This quarter, we are pleased to reiterate five key perspectives.

Growth in key markets. We achieved strong improvements in both sales and profitability in Q3, driven primarily by demand for meals ready to eat, defence powders and Rotomag. This reflects the growing demand for advanced lightweight solutions and demonstrates our ability to capture growth opportunities in critical sectors, including defence and high-end automotive markets.

Financial strength. 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. Maintaining financial stability remains important, and our leverage ratio stands at a low 1.3 times.

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%. This reflects our disciplined approach to cost control and restructuring efforts. Driving clean energy initiatives. We are 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. While we expect this growth to be gradual, our ongoing innovations position us well for long-term success in the clean energy space. And last, strategic alignments. The sale of the graphic arts business is moving forward, with an expected close in the first half of 2025. This transaction will allow us to sharpen our focus on core growth areas, ensuring alignment with our long-term strategic vision.

These highlights demonstrate our ability to capitalise on key opportunities and maintain a steady progress as we approach 2025. With that, I'd like to turn the call back to the operator for the question and answer session. Beau, please go ahead.

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. And we'll go first this morning to Steve Ferrazani at Cedote.

Morning, Steve.

What I asking is is that all your lower cost magnesium that now passing through the income statement or is there been helped by some improved product mixers as well I perhaps ask Steve Webster to provide them with a color Yeah, I mean, in terms of you asked about the pull forward, it's difficult to get an exact number on that.

It's probably around about $2 million plus of revenue. With, I guess, the fixed cost element deleveraging, you'd probably get maybe up to $1 million of additional margin on that. I mean, clearly, on that side of the business, the meals ready to eat did very well. In terms of the quarter with the hurricane activity. In terms of margin and sustainability, I mean, that's about an 18% margin for electron. Normally, we would have thought sort of 20%, if you go back a couple of years, was an electron margin we would aspire to. So we're not quite there yet, but clearly we're a little bit lower, I guess, 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.

Yes. This is Andy. Part of that has been the industrial cylinder sales into Europe, which has been helpful out of gas cylinders. 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.

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. So I do think that transportation of hydrogen is going to be a really important link in the green hydrogen chain, 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. You also asked about the CNG market, and you mentioned the North American product, the new CNG 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. Now the manufacturing of the engine is only just starting to ramp up now, and that's planned to go on through 2025. 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.

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. But I'm certainly not expecting any significant impact for us on quarter four, and maybe even not in quarter one. But certainly as we get into the middle of next year, I'm looking for that to really move the needle in terms of the adoption of CNG in North America.

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

With this individual buyer, they ultimately weren't willing to meet our valuation, so we have moved on. I mean, 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, but there are a couple of new ones coming in as well. So it can take a bit longer to get these things done, but I think the way we're sort of fairly far down the road already with some of them, I think there's a reasonable chance we can do it in the first half of next year.

Thanks, Andy.

Thank you, Beau, and thank you for the question, Steve. In closing, I think I want to emphasize how proud we are of the progress that LUXFER's made this year, and especially the performance in the third quarter. The foundation that we've laid with sequential growth in profitability, strengthened operational efficiencies, strategic investments in clean energy 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. We're excited about the future and remain committed to maximizing Thank you for your continued support and confidence in LUXFER. We look forward to updating you next quarter.