LUXFER HOLDINGS PLC Q2 FY2024 earnings call

• The Luxfer team made steady progress in the second quarter, achieving sequential improvement in sales, two consecutive quarters of sequential profitability, and solid cash flow in the first half of 2024.
• The process to sell the Graphic Arts business is in the detailed final stages, targeting completion in the third quarter. Adjustments to asset valuation have been made to reflect expected net proceeds from the sale.
• Work is ongoing to enhance Gas Cylinders and Elektron segments by reducing costs and executing profitable growth opportunities driven by innovation and strategic investments.
• Focus on driving profitable long - term growth with initiatives such as the deployment of high - pressure tank technology for CNG, development of next - generation transportation modules, and the uptake of the UGR - E Flameless Ration Heater.

Elektron: Second quarter of 2024 showed strong turnaround in profitability despite year - over - year sales and end market headwinds. Adjusted EBITDA margin reached 29.5% up over 1000 basis points due to legal recovery. Without legal recovery, margin would have been approximately 17.4%. Gas Cylinders: Demonstrated continued growth in Q2 with sales of $49.8 million, up 2.7% year - over - year and 9.7% from Q1. Gross margin improved by 80 basis points to 16.7%, while adjusted EBITDA margin slightly decreased to 9.8%. Sequential adjusted EBITDA up 19.5% and margin up 80 basis points. Revenue contribution: Elektron and Gas Cylinders are key segments, with Gas Cylinders at $49.8 million in Q2, contributing a significant portion to the overall $91.8 million sales.

• 2024 guidance does not include the Graphic Arts business. Adjusted EBITDA is projected to be between $47 million and $50 million.
• Adjusted diluted EPS is ranging from $0.90 to $1.
• Higher free cash flow is anticipated to be between $24 million and $27 million. The guidance was raised due to the recovery of $5.1 million of historical legal costs.

• Variable demand across markets is a risk. The overall market remains soft, which could impact performance.
• Uncertainty in the sale process of the Graphic Arts business, as these things can sometimes slip from the targeted timeline.

Q: Thanks for all the detail on the call. I did want to ask about guidance because -- and congratulations on the $5 million legal expense recovery. But if we back that out It looks like the high end of your guidance on EPS came down a little bit. And obviously your sales growth is down a bit. Can you give us a sense of what's changed in the last three months in terms we're going slightly more negative in your outlook?

A: Thanks. Thanks, Steve. This is Andy. Let me, first of all, underscore that I'm very encouraged by the progress we've made over the last six months. We have seen the expected initial recovery in demand across certain of our Elektron applications and a robust performance in the Gas Cylinders segment. The operational optimizations we've made have been successful. Our teams are motivated and engaged. At the midpoint we're up $0.125 on our initial guidance. That's coming from a solid business execution in the first half of the year. And, yes, especially from those $5.1 million legal cost recovery. We're in good shape Steve as we ended the last half of the year.

Q: Can you talk a little bit you mentioned the CNG engine, which I know a lot of people are very excited about that are involved in it. And have exposure to it. It sounded like you said you think it's a benefit starting in 2025. Any reason to think it could come earlier than that?

A: Yes. We're really excited about this new engine that's coming out. And I'm glad we had opportunity to talk about that a little bit in the prepared remarks. As you know Cummins are in the process of launching this new CNG engine the X15N. It's expected to create the -- in part the adoption of clean fuels and heavy - duty trucks. It's offering extended range and reduced emissions. So we've already seen some increased demand from that. Sales of our high - performance lightweight cylinders for that have already increased by almost $6 million year - to - date 2024 versus 2023. Now some of that is prebuilt. It's priming the pump for the product launch but we should see strong follow - on demand once the product gets some traction in the marketplace. We're modeling that as a notable opportunity for us in 2025. But yes, it's one of the things that could drive us towards the upside of our guidance if we see some demand in Q4.

Q: And if I could just ask about the gas modules as well as the UK plant. Is that up and running now? And is that also you're thinking more of a 2025 impact?

A: We'll see some benefit from that later in 2024. So the manufacturing facility is all constructed and I saw the first module start to go through that facility just a just a couple of weeks ago. So excited what introducing a very lightweight means of transporting gas in modules might mean to the market for the future. It's our intention to have the first module or modules built this year and indeed the first sale right at the end of this year. So it gives us a slight uptick in 2024. And then, yes, very excited about that for 2025 and beyond. You'll recall perhaps that the facility has a total capacity for $40 million of modules. We won't see all of that in 2025, but it will be a notable and meaningful contributor to our higher sales in 2025.

Q: If I could just get one more in update on the timing of the Graphic Arts sale. Sounded like in the commentary you said that business was getting a little bit better. Does that have any impact on pricing? Can you not really comment on that?

A: Steve is running that process for us. Very pleased with how that's going and I'll let him comment on that. Steve Webster: Yes. I mean as we said in the prepared remarks, Steve, it's probably slightly ahead of schedule in terms of what we said previously. We had said by the end of the year, it's making good progress. So we are working with an exclusive buyer. And we're getting towards the closing stages we believe of that project. So we're certainly targeting it for quarter three. But obviously, these things can slip, but certainly quarter three is most likely I think. In terms of price, I mean, you may have noted, we have made some adjustments to the asset value. So, we are expecting it to be slightly lower than our previous expectations. It's important to recognize that this business did lose the best part of $5 million last year and $1.5 million to $2 million in quarter one. It has just approached breakeven. So there is some sign that it's turning around. But nonetheless, it has struggled a little bit. So we have expected the price to fall a little bit there. We have run a very comprehensive process though of over 100 prospective suitors. So we believe we will get the best price we can for that business in the circumstances.