Luxfer Q2 2023 Earnings Call Transcript

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Provided by Quartr
July 26, 2023

There are 4 speakers on the call.

Operator

Good morning. My name is Chelsea, and I will be your conference operator today. Welcome to Luxfer's Second Quarter 2023 Earnings Conference Call. All lines have been placed on mute. After the speakers' prepared remarks, we will hold a question and answer session.

Operator

Now I will turn the call over to Mike Gayden, Vice President of Investor Relations and Business Development from Luxfer. Mike, Please go ahead.

Speaker 1

Thank you, Chelsea. Welcome everyone to Luxfer's Q2 2023 earnings call. With me today is Andy Butcher, Luxfer's Chief Executive Officer and Steve Webster, Luxfer's Chief Financial Officer. On today's call, we will provide details of our 2nd quarter performance as reported in the press release issued yesterday. Today's webcast is accompanied by a presentation that can be accessed at luxfer.com.

Speaker 1

Please note any references to non GAAP financials are reconciled in the appendix 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 2 of today's presentation for further details. Now, I will turn the call over to Andy for his summary comments on the And our outlook, after which Steve will provide details of our financial results and updated 2023 guidance. Andy will then offer some additional comments before Q and A.

Speaker 1

Andy, please go ahead.

Speaker 2

Thank you, Mike, and welcome, everyone. Please turn to Slide 3. I'm pleased to share with you details of our 2nd quarter performance that included sequential gains in both adjusted EPS and cash flow. Our team at Luxfer again worked successfully to deliver for our customers in a dynamic environment and to take actions to improve our bottom line results. Combined, these efforts enabled us to deliver quarterly adjusted EPS of $0.27 ahead of the expectations outlined in our Q1 call.

Speaker 2

Total sales increased to $110,000,000 led by gas cylinders, which increased sales by 5% With success in alternative fuel and medical markets, Gasilander's adjusted EBITDA measured the highest since Q4 2021, underscoring our ongoing efforts to both further recover inflation of the last few years and to manage our costs in that business segment. Luxfer Magtech Solutions delivered the highest revenue since Q4 2017 anchoring strong results in our defense, 1st Response and Healthcare Markets. Similar to Q1, however, transportation and general industrial sectors weighed on our overall performance. The softness we discussed last quarter in these areas became more pronounced in Q2, impacting our short term outlook. Against this demand backdrop, we've undertaken action to reduce costs, drive cash flow and reinforce our strong capital position.

Speaker 2

Our $10,000,000 in Q2 free cash flow and related $5,000,000 reduction in net debt reflects our drive to operate our business efficiently in the current environment. And while our back half outlook is pressured, we remain optimistic about our opportunities for growth in sales And earnings over the long term. I would now like to turn to Slide 4 to provide an update on current business conditions. Over the last 90 days, we've experienced an increase in the external headwinds facing Luxfer. The broadest based phenomenon impacting our outlook is the destocking that we are seeing as customers take a more cautious approach to inventory holding.

Speaker 2

In an environment of higher interest rates, some customers have shown increased price sensitivity and tight labor conditions continue to inhibit Conversion of end user demand into orders in otherwise more buoyant markets. Turning to the supply chain, There are now further competitive pressures in our graphic arts business. As we discussed previously, the ongoing outage of U. S. Magnesium has driven us to source non domestic raw magnesium at a higher cost.

Speaker 2

In addition, increasing the aggressive competition from Asian manufacturers in the European market Has impacted performance for this product line. In response, we are working to reduce variable costs and to launch a new differentiated product to help reinforce our positioning. In hydrogen, growth continues, although the rate of market development remains constrained by the push out of fuel availability, Government approvals and project delays, we remain optimistic about the attractiveness of this promising market. 2 other macro factors also weighing somewhat on our results. The recent weakening of the U.

Speaker 2

S. Dollar against the pound Will inhibit our reported profitability given our appreciable UK manufacturing footprint. In addition, Higher interest rates are also pulling our profits lower year over year. We are taking meaningful action across the organization in response to these external challenges, which I will detail later in the call. Despite the pressure brought by these external factors, we remain focused on our business objectives for 2023 and beyond, having made investments in talents and capabilities to position us for sustained profitable growth.

Speaker 2

Steve will now discuss our updated outlook for 2023 after reviewing more details about our Q2 performance. Steve? Thanks, Andy. I'll begin on Slide 5 with a summary

Speaker 3

of our sales performance by end market. Defense First Response and Healthcare sales by 42% driven by sustained strength in military demand, continuing the trend seen in the last two quarters. Sales of chemical kits, MREs and countermeasure flares for the military led gains in this end market. Medical oxygen cylinders and pharmaceutical sales in Elektron rounded out our increases in this category for the quarter. Transportation sales declined 11%.

Speaker 3

Following a period of substantial restocking, we realized lower inflatable sales, While automotive remained substantial, but softened later in the quarter. However, alternative fuels increased led by sales of our high capacity gstorgo CNG cylinder with hydrogen revenues also higher. General Industrial sales decreased 23% Following Q1's 8% decline, we saw weakness in magnesium photoengraving plate and industrial gas cylinders, areas we have highlighted on our prior calls. Encouragingly, SoluMag sales look to be turning a corner and are showing some signs of recovery. The performance of our end markets this quarter underscores the benefits of our significant tied to less cyclical sectors like defense, first response and healthcare, as well as the positives of our linkage to secular growth areas such as clean energy.

Speaker 3

Now please turn to Slide 6 for a summary of our consolidated 2nd quarter financial results. 2nd quarter sales of $110,400,000 increased $900,000 from the prior year. This growth was underpinned by $6,500,000 of price actions to pass through rising input costs, partially offset by adverse volume and mix. Consolidated adjusted EBITDA of $14,400,000 in Q2 decreased $2,500,000 from the prior year. Price recovery exceeded inflation by $1,600,000 which was offset by negative impacts from volume mix of $3,900,000 and foreign exchange of 0 $400,000 We continue to take action to reduce cost and drive efficiency gains as well as to further address inflationary dynamics In the present demand environment.

Speaker 3

Now let's turn to our segment results on Slide 7. Elektron sales of $61,900,000 decreased 2% from the prior year, driven by volume mix, which was partially offset by price increases. Elektron's adjusted EBITDA of $9,500,000 decreased 28% due to volume mix effect as well as the impact of legal fees. Timing in our recovery of inflationary costs during 2022 make year over year comparison challenging for this segment throughout 2023. DAS cylinder sales of $48,500,000 increased 5%, helped by our efforts to address cost pass through, partially offset by volume mix and foreign exchange.

Speaker 3

Adjusted EBITDA of $4,900,000 rose 32% from $3,700,000 prior year due to inflation recovery and fixed cost savings projects. More broadly, we expect to advance our initiative to restore Gas Now I'd like to update discuss our updated 2023 outlook on Slide 8. As a result of the external demand environment Andy outlined earlier in the call, we are updating our full year outlook. The demand Conditions suggest a revenue decline of 1% to 4% for the year. While we continue to take measures to underpin our profitability Amid this reduced sales outlook, we now target 2023 full year adjusted EPS of $0.88 to $1 As demonstrated by our Q2 performance, we are also focused on cash generation and inventory levels, the latter of which were favorably reduced by $10,000,000 in the quarter.

Speaker 3

Furthermore, we are maintaining our 100% goal for adjusted free cash flow conversion I'm working hard to deliver this in the current operating environment. While continuing to invest in sustained profitable growth, we are moderating our for the year by $2,500,000 at the midpoint to a range of $10,000,000 to $12,000,000 as part of our response to the external environment. Recognizing the challenges ahead for the medium term, I look forward to updating you on our progress to not only deliver on our 2023 financial objectives, but our further efforts to reinforce our positioning for long term growth. Now I'd like to turn the call back

Speaker 2

to Andy. Andy? Thank you, Steve. As promised, I will now share specific details on how we are leveraging our operational excellence expertise to mitigate the impact on our business of the stress Demand environment, please turn to Slide 9. Luxfer has a strong heritage of lean operations which has been embedded in our culture for almost 3 decades and now forms part of the Luxfer business system and a goal of $2 adjusted EPS in 20.25.

Speaker 2

Using these capabilities, we have worked quickly to remove both fixed and variable costs from our business. Firstly, in Gas Cylinders, We took steps to simplify our footprint during Q2, transferring alternative fuel production from Pomona to our other North American facilities in Riverside and Calgary. This maximizes both our efficiency and our total output and is delivering $1,100,000 of ongoing annual fixed cost reductions Through headcount elimination and other savings. Secondly, in Elektron, we are in the very final stages of the project to consolidate 3 powders manufacturing sites into just two facilities. This delivers a further $900,000 of annualized savings beginning in Q4 and allows us to sell one of our owned manufacturing sites.

Speaker 2

Thirdly, across our business, In response to the lower demand environment, we have moved quickly to generate savings through optimizing our headcount. This unfortunate but necessary activity has reduced our number of employees by, for example, over 10% in Graphic Arts and Magtech Solutions. Finally, as Steve reported, we are focused on reducing inventories in order to drive free cash flow while maintaining our current high levels of customer service. We expect our emphasis on lean operations, including these current initiatives to provide significant long term gains in our drive for sustained profitable growth. Now let's conclude by quickly reviewing Luxfer's strong position for value creation.

Speaker 2

Please turn to Slide 10. Despite some near term challenges with industrial demand, Luxfer's mission to help to create a safe, clean and energy efficient world holds growing resonance amid increasing appreciation of the importance of climate change and defense preparedness among other areas. Our cost and efficiency actions now underway will help support our bottom line performance in 2023. At the same time, our investments in innovation and talents to drive growth will create value over the long term. We are deploying the right strategy.

Speaker 2

We are focused on the right markets with long term growth drivers and we are commercializing the right differentiated products. We remain confident in the bright future ahead of us. Now, I would like to turn the call back to the operator to begin the Q and A session. Chelsea, please go ahead.

Operator

Yes, sir. And it appears that we have no further questions at this time. An encore recording of this conference call will be available in about 2 hours. A link to a recording of this broadcast will be available on the Luxfer website at www.luxfer.com. Thank you for joining us today.

Operator

The next regularly scheduled call will be in late October when the company discusses its Q3 2023 financial results. This ends the Luxfer conference call.

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