Luxfer Q1 2025 Earnings Call Transcript

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April 30, 2025

There are 6 speakers on the call.

Operator

Good morning. My name is Madison, and I will be your conference operator today. Welcome to Luxfer's First Quarter twenty twenty five Earnings Conference Call.

Operator

All lines have been placed on mute. After the speakers' 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. Kevin, please go ahead.

Speaker 1

Thank you, Madison, and good morning, everyone. Welcome to Luxford's first quarter twenty twenty five earnings conference call. This morning, we'll be reviewing Luxford's financial results for the first quarter ended 03/31/2025. 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.

Speaker 1

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. During today's call, we'll be providing adjusted first quarter twenty twenty five financial results, excluding the graphic arts business and 2024 legal recoveries.

Speaker 1

Now let me introduce Luxford's CEO, Andy Butcher. Please turn to Slide three. Andy, please go ahead.

Speaker 2

Thank you, Kevin, and good morning, everyone. Thank you for joining us. We are very pleased with our first quarter performance. Our team delivered adjusted earnings per share of $0.23 up from $0.20 a year ago and maintained net debt at approximately $42,000,000 or 0.7x leverage. Sales revenues grew significantly, led by Electron and driven especially by off cycle demand in flameless Russian heaters as well as our group Russian UGREs, reflecting higher 2025 demand from our defense applications as well as commercial customers replenishing inventories.

Speaker 2

We also saw a continuation of the rebound in defense flares and aerospace, and our overall order books as we left the quarter were elevated by 12%. We'll dive deeper into the encouraging UGRE outlook later as a flagship example of our Luxor business system in action. The planned divestiture of our Graphic Arts business is nearing completion and remains on track to close by the middle of the year, which will enable us to sharpen our focus on higher margin growth opportunities. I'm also pleased announce that order has been secured for our first bulk gas transportation system in Europe, a milestone that underscores Luxa's expertise in large scale compressed gas handling as we expand our international gas solutions portfolio. Turning to tariffs.

Speaker 2

Through a variety of proactive and reactive steps, we have effectively avoided or neutralized incremental direct duty costs as of now. This insulation from recent tariff actions reflects deliberate forward looking activities across the business. Based on work of the past several years, there are fully approved reciprocal tariff exemptions covering our electron alloys and most of our zirconium inputs. Nearly all cylinder trade within North America benefits from USMCA protections, and we have additionally used duty drawback programs and local sourcing to limit cross border exposure. Combined with some minor price changes where necessary, I'm pleased to say that these strategies have positioned us to minimize direct reciprocal tariff impacts today.

Speaker 2

That said, we remain attentive to evolving macro risks. We are very closely monitoring ongoing developments around rare earth supply channels from China and broader trade policy dynamics. Furthermore, should new duties emerge, we are prepared to adjust our sourcing, pricing and operational strategies as needed and our heavy weighting in defense, first response and aerospace continues to position us well against any broader economic slowdown. Overall, Q1 demonstrates that Luxfer can execute effectively in a dynamic environment. With a strengthened backlog, we remain encouraged by our internal performance and the near term outlook.

Speaker 2

With that, I'll hand the call over to Steve, who'll provide details of our financials and share our 2025 guidance. Steve? Thanks, Andy,

Speaker 3

and good morning, everyone. Let's turn to Slide four for a review of our consolidated financial results. In the first quarter, sales were $90,500,000 up 8.9% year over year on solid end market demand. Adjusted EBITDA rose 9.7% to $11,300,000 delivering a 12.5% margin. We generated $5,100,000 of cash from operations, a $1,500,000 increase, and maintained a low net debt of $41,900,000 On the right, our sales bridge shows that volume and mix contributed $7,200,000 driven by off cycle defense pull ins for MREs and flares plus an improving aerospace backlog.

Speaker 3

Pricing added $500,000 reflecting SCBA escalators and selective customer increases, partially offset by repricing in Electron due to certain lower input costs. FX was a modest $300,000 headwind. For our adjusted EBITDA walk, net deflation added $600,000 Volume and mix and pricing contributed $3,700,000 and $500,000 respectively, while adverse factors of $3,700,000 largely reflect $1,700,000 of transitional production costs and $1,200,000 of elevated logistics and ongoing investments. For a full breakdown, please see the detailed waterfall in the appendix on Slide 12. Now let's turn to Slide five for a detailed review of Electron's first quarter financial performance.

Speaker 3

Our Electron segment harnesses proprietary magnesium and zirconium platforms in markets where higher performance is critical. We serve customers who demand deep technical expertise, whether that's ultra lightweight alloys

Speaker 4

aircraft

Speaker 3

range and cut fuel burn, countermeasure flares and self heating MRE powders that protect and sustain personnel in extreme conditions or zirconium based catalysts and oxides that drive precision in advanced manufacturing, clean energy solutions and critical health care applications. By focusing on high barrier defense and aerospace driven end markets, Electron commands premium pricing and high margins, powering sustained growth as global demand for safety, reliability and performance continues to climb. In the first quarter, Electron sales rose to $49,400,000 up 31% from $37,700,000 a year ago. Adjusted EBITDA increased to $8,700,000 and our EBITDA margin expanded to 17.6%, a 120 basis points improvement versus the prior year. Growth was broad based across our core end markets.

Speaker 3

Defense, first response and health care led the way, up 76. Customers continued to restock flameless ration heaters and meals ready to eat products, and demand for our related UGRE product is still increasing. We also saw a meaningful pickup of demand for both our magnesium aerospace alloys and magnesium powders for countermeasure flares as customer manning and production issues began to ease across both market sectors. Alloys lifted our transportation revenues by approximately 11% despite some softness in automotive catalysis. In Specialty Industrial, market conditions resulted in flat to modest growth of around 1%.

Speaker 3

Adjusted EBITDA margin expansion reflects the impact of higher volumes relative to fixed costs as

Speaker 2

well

Speaker 3

as a favorable shift towards higher value defense programs. Furthermore, there is ongoing payoff from the site consolidation and lean operational efficiencies we embedded under our Luxfer business system last year, which will continue to deliver cost savings and margin resilience. Overall, Electron's performance underscores the power of focused execution and targeted innovation. With that, let's turn to Slide six for our gas cylinders results. Luxfer gas cylinders is the benchmark for mission critical pressure vessels anchored by FCBA market leadership and long standing partnership with blue chip OEMs.

Speaker 3

Our lightweight rugged cylinders protect fire, emergency and hazardous environment teams, while our high performance, high strength cylinders enable life support and operations in aerospace and space exploration applications. We also serve specialty industrial, medical and alternative fuel markets with precision engineered solutions. Backed by proprietary processes and rigorous qualifications, this segment commands premium pricing and delivers resilient margins in high barrier markets.

Speaker 2

In the first quarter,

Speaker 3

gas cylinders revenue was $41,100,000 down 9% from $45,400,000 in quarter one twenty twenty four, and adjusted EBITDA came in at $2,600,000 reflecting a 6.3 margin versus 9% last year. This performance was largely in line with our expectations. We saw softer demand in alternative fuel cylinders with the heavy duty truck market still subdued. Aerospace and especially space exploration demand is robust, although overall transportation sales declined about 23 despite the anticipated softness in alternative fuels, the strong aerospace volumes and the order for our first bulk gas transportation module will open new opportunities for future growth. Although down 7%, our defense, first response and health care business held up relatively well with steady orders for SCBA and an improving outlook.

Speaker 3

Specialty industrial posted a notable 25% increase, driven by electronic and calibration gas applications. Margin compression resulted from the lower volumes, although pricing actions helped offset some headwinds. Importantly, the efficiency initiatives we put in place last year are now starting to stabilize margins, and we expect these permanent measures to support stronger second half. In summary, while gas cylinders faced headwinds in certain end markets, our core first responder, aerospace and health care related cylinders remained resilient, and our cost and efficiency focus will continue to drive improvements. Now please turn to Slide seven for an update on our full year 2025 financial guidance.

Speaker 3

I'd like to reinforce two key themes from Andy's opening comments: our tariff resilience and the strength of our backlog across defense, first response and aerospace applications. Combined with our diversified portfolio, these factors give us some confidence despite the uncertain macroeconomic outlook. Accordingly, we are reaffirming our full year 2025 guidance, unchanged from what we communicated in February, with expectations for flat revenue growth. We continue to anticipate adjusted diluted earnings per share in the range of $0.95 to to 1.05 and adjusted EBITDA between $48,000,000 and $52,000,000 and free cash flow generation of $20,000,000 to $25,000,000 for the full year. This outlook reflects our confidence in the aggregate underlying demand from our end markets, combined with disciplined cost management, prudent price actions and tight working capital controls.

Speaker 3

That said, foreign exchange does remain a key sensitivity. And indeed, we have seen significant volatility in the last few weeks. For our business, a $05 move in the dollar versus sterling can shift our full year earnings by around $1,000,000 although we continue to hedge selectively to mitigate some of that risk. On capital deployment, we'll maintain our routine share repurchase program with Board authorization for up to $10,000,000 of additional opportunistic buybacks. We're also evaluating further simplification and cost reduction initiatives to drive improved efficiencies across our operations.

Speaker 3

We remain confident that our fortress balance sheet and diversified end market exposure will enable us to navigate any remaining headwinds and deliver on our projections. Now I'd like to pass the call back to Andy.

Speaker 2

Thank you, Steve. Please turn to Slide eight. Our Luxfer business system gives us a structured way to innovate, drive efficiency and stay agile, always focused on meeting customer needs and delivering profitable growth. Prime example is our unitized group, Russian's UGRE platform, where lean principles and direct user feedback have produced a highly portable, low touch module crafted with environmentally friendly materials, perfectly suited for today's dynamic field environments. Military teams operating in austere or rapidly changing settings have found this additional option vital, not only in deployments without dedicated kitchen staff, but also during training exercises where permanent mess facilities are not available.

Speaker 2

By minimizing manpower requirements and set up complexity, UGRE enables sustained operations anywhere. Sales of UGRE reached a record $4,600,000 in 2024, and our backlog for this year indicates demand will more than double that level in 2025. I'm especially proud to share that the U. S. Military is tendering UGRE modules for its war stock under a vendor managed inventory program.

Speaker 2

This underscores our confidence in UGRE as a strategic complement to traditional single person meals ready to eat and highlights our ability to deliver and replenish these platforms seamlessly. These advancements, portability, low touch operation and military validated inventory support exemplify how the Luxor business system embeds continuous customer driven innovation into everything we do. Now please turn to Slide nine to review the highlights and achievements of the first quarter. We delivered solid operational execution in Q1, posting adjusted earnings per share of $0.23 and generating $5,100,000 of cash from operations, turning a typically working capital intensive first quarter into a net inflow. The sale of our Graphic Arts business remains on track to close in the first half of twenty twenty five, freeing up capital and talents to fuel higher margin growth opportunities.

Speaker 2

Margin and cash discipline remain at the core of our model. Permanent process improvements, disciplined working capital management and careful pricing decisions have not only widened margins, but also maintained low levels of net debt. Our targeted innovation continues to drive results. The lean driven redesign of UGRE and standout MRE performance showcase how the Luxfer business system accelerates customer focused solutions in one of our important defense oriented product lines. Finally, our proactive approach to tariff risk from leveraging Critical Materials exclusions and USMCA coverage to long term supply agreements, inventory buffers and dynamic pricing positions us to weather tariff disruptions with minimal impact.

Speaker 2

The results we have shared this morning reflect our long term focus, executing today while investing in tomorrow. Since our October 2023 strategic review, we've acted on key opportunities: divesting Graphic Arts, on track for H1 twenty twenty five and driving cost, innovation and margin gains in both electron and gas cylinders to sharpen our portfolio and boost profitability. We also remain attentive in assessing market conditions to maximize future shareholder value. Thank you to our global associates for their dedication, and thanks to all of you for your continued interest in Luxfer. I'll now turn the call back to the operator for questions.

Speaker 2

Madison,

Speaker 3

please go ahead.

Operator

And we will take our first question from Steve Verrazzani with Sidoti. Please go ahead. Your line is open.

Speaker 5

Good morning, Andy. Good morning, Steve. Appreciate all the detail on the call. Certainly strong start to the year outperformed our expectations. I don't know if it outperformed your internal expectations.

Speaker 5

But just trying to find out anything special in the quarter. Were there any pull forwards? And does this set you up because you didn't raise guidance, does this set you up for a better year?

Speaker 2

Thanks, Steve, and good morning. Yes, we were pleased with the Q1 results. I think the thing we were most pleased about was the strength in the defense market. Q1 was particularly encouraging in that respect. The sales of the flame disruption heaters were good and should remain elevated.

Speaker 2

UGRE range ramping up, that's helpful. Magnesium powders for flares, magnesium alloys for defense. Those are encouraging, especially flares. So overall, we're very positive on the defense sector for 2025. And of course, we're conscious about monitoring macroeconomic changes closely, thinking about future tariffs, exchange rates, supply of rare But we like where we sit at the end of quarter one, and that's why we're reaffirming our guidance.

Speaker 5

Okay. I was particularly surprised, but I know it's off a small base, but the strength you saw in Specialty Industrials in the gas cylinder side, Anything driving that?

Speaker 2

Yes. I think there's some long term trends in specialty industrial gas cylinders. Our product there is targeted on profitable niches where high value niches where customers are looking for special high purity gases to be stored in cylinders with inert surfaces. So these aren't routine industrial gas products. These are specialty items.

Speaker 2

They find their way into gases for semiconductors, for other electronics applications, for calibration gases. And there are a number of reports suggesting that long term, the need for those gases will increase. So yes, that's encouraging.

Speaker 5

Great. If I can ask about uses of cash. Obviously, your balance sheet now is in such virtually pristine shape. It sounded, Steve, like you had mentioned that you would increase the buyback by $10,000,000 for opportunistic purchases. Can you talk about capital allocation in this environment where your CapEx is so low, how do you think about buybacks?

Speaker 5

And also if you can touch on M and A potential?

Speaker 3

Yes. I mean, first of all, I'll cover the thanks, Steve. I'll cover the buyback. So what I said is that we're continuing our standard buyback program, which is effectively an anti dilution program for management incentives. We have authorization for of $10,000,000 from the Board to do opportunistic buybacks.

Speaker 3

We have not commenced that yet, but we're clearly looking at that. That's an interesting area for us, particularly if the price the stock price remains where it is. In terms of CapEx, yes, I mean we only spent around $1,000,000 in quarter one. That said, we will be expecting to spend more this year than we have in previous years. So the guidance says 12,000,000 to $15,000,000 of CapEx.

Speaker 3

We're still looking at so we've maintained that. That's the same as it was at the end of quarter four. So we are looking for a ramp up in CapEx this year. There's some good opportunities for growth CapEx as well as our standard maintenance CapEx. And on M and A, yes, we always remain open minded.

Speaker 3

We have a pipeline of opportunities that we constantly review with our business units. So nothing imminent at the moment, but it is something we're always looking at.

Speaker 5

Great. And can I just ask about I know some of your defense business, some of the higher margin like MREs can be lumpy, But you've had almost three consecutive quarters of very strong numbers there? Is that because of the UGRE launch? Or is there something else driving that? And how sustainable is

Speaker 2

It's two things, Steve. It's the UGRE, which continues to ramp up, as you've highlighted, but it's also some elevated levels of replenishment that's going on most of this year, probably at least through quarter three in military stocking. So there's some way to go on that as well as stronger sales in the flares market. So yes, it does look positive at the moment.

Speaker 5

Great. Great start to the year, guys. Thanks, Andy. Thanks, Steve.

Speaker 2

Thanks, Steve.

Operator

There are no more questions in queue. At this time, I'll turn the call over to CEO, Andy Butcher, for final remarks.

Speaker 2

Thank you. As we conclude, I want to remind you what makes Luxfer a compelling investment. In Q1, we not only delivered strong first quarter cash flow, but we also expanded margins and generated top line growth in our core defense and aerospace end markets. Our lean driven Luxfer business system has permanently embedded cost and process improvements, while targeted innovations such as UGRE and the recently launched bulk gas transportation module demonstrate our ability to respond to customer needs. We have a solid balance sheet, low leverage and recurring demand in high barrier businesses.

Speaker 2

And with board authorized share repurchases, disciplined capital allocation and a robust backlog underpinning our outlook, we are well positioned to deliver sustainable long term value. Thank you to our global team dedication, and thank you all for your support. We look forward to updating you next quarter.

Operator

Thank you. This concludes Luxfer's Q1 twenty twenty five 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.

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