Good morning, my name is Katie and I'll be your conference operator today. Welcome to the Luxfer's Third Quarter 2022 Earnings Conference Call. 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 Mike Gaiden, Vice-President of Investor Relations and Business Development for Luxfer. Mike, please go ahead.

Thank you, Katie. Welcome everyone to Luxfer’s third quarter 2022 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 third quarter and year-to-date 2022 performance as detailed in the press release issued yesterday. 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 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. Now, I will turn the call over to Andy for his summary comments on the quarter, after which Steve will provide details of our financial results. Andy will then provide some concluding remarks before Q&A. Andy, please go ahead.

Thank you, Mike, and welcome everyone. Please turn to slide three. I'm pleased to share with you details of our third quarter performance, which includes year-over-year growth in both revenues and profits. I want to start though by expressing my appreciation to the entire Luxfer team who once again took on a challenging supply-chain environment to serve our customers. Our team's ongoing focus and dedication has helped to sustain the momentum of our first-half results. On this slide I want to highlight three key messages. Firstly, regarding our quarter three financial performance we delivered nearly 10% year-over-year sales growth, continuing the gains realized in both quarters one and two. This quarter three revenue growth was primarily driven by our ongoing success in passing through cost inflation, which more than offset foreign-exchange headwinds. Our Q3 adjusted diluted earnings per share of $0.35 continued our progress towards achievement of our existing full-year guidance. Elektron again led our performance, driven by successful execution in a wide variety of end markets. Gas Cylinders continues to work through inflation related challenges, passing through current cost increases wherever allowed by contract. Our capital position remains a source of strength with a net debt to EBITDA ratio of 1.2 times. Secondly, we continue to see solid overall demand in Q3. We realized 30% revenue growth in the general industrial end markets, and 7% growth in defense, first response and healthcare. Supply chain challenging with continued pressure on both material availability in some areas and higher costs. Although we are seeing some indications of slowing demand in certain European end markets, we still benefit from a healthy overall backlog at the end of Q3, well ahead of prior year. Thirdly, based on a combination of our sound year-to-date results and our assessment of the macroeconomic outlook and supply…

Thanks, Andy. I'll begin on slide five with a summary of our performance by end market. In the defense, first response and healthcare end markets, quarter three sales rose by 6.8%, as growth in defense aerospace alloys and medical cylinders more than offset lower demand for flameless ration heaters, which was expected given the low levels of US troop deployments in the field. Quarterly sales in transportation decreased 6.1%, contraction in alternative fuel sales more than offset expansion in the autocatalysis and commercial aerospace and buckets, which continue to rebound towards pre COVID levels of activities. We expect alternative fuels to build upon the sequential improvement seen in quarter three and it signs of deepening commercial commitments to hydrogen transportation and storage applications, backed by government funding initiatives. Our general industrial sales grew 30% year-over-year in Q3, leading our overall revenue expansion for the quarter. Elektron sales increased in nearly all industrial categories, continuing the broad based strength in quarter two. Commercial Magnesium powders, zirconium applications and [indiscernible] industrial products fuel this industrial strength. Overall, we are encouraged by Q3 sales results, helped by our differentiated product offerings. Now please turn to slide six for a summary of our third quarter financial results. Third quarter sales of $100.2 million increased $9.0 million or 9.9% from the prior year. Our quarterly revenue benefited from $13.3 million of price actions taken to address input cost increases, as well as from volume and mix contribution of $0.6 million. We experienced foreign-exchange headwinds of $4.9 million, meaning, sales revenues increased by 15% excluding foreign-exchange. Consolidated adjusted EBITDA of $16.1 million for the quarter increased $2.3 million or 16.7% from the prior year, helped by our success in passing along inflationary costs and growing volume in a challenging environment. FX contributed a positive $0.8 million…

Thank you, Steve. Before concluding our prepared comments, I would like to reflect briefly on two milestones reached this year, as well as our growth strategy development. Please turn to slide 11. 2022 brings the 125th anniversary since our founding in Chicago, as well as the 10th anniversary of our public listing on the New York Stock Exchange. We have accomplished much since we began manufacturing innovative glass prisms back in 1997 and I'm proud to being with Luxfer for 30 years of this journey. If I think about our mission to help to create a safe, clean energy efficient world I want to highlight some of our successes. Delivering technological advances has reduced the weight of breathing apparatus cylinders by using carbon fiber, helping to increase safety for first responders, introducing proprietary magnesium alloys that have enhanced the capabilities of commercial and military aircraft, deploying fully-integrated systems for the hydrogen markets across varying transportation modes which are contributing to a cleaner environments, developing zirconium and magnesium based solutions aimed at lifting the performance and reducing the costs of both rechargeable batteries and fuel cells, supplying safe flameless ration heaters, so those impacted by natural disaster, including recent shipments to those affected by flooding in Kentucky and by hurricane Ian in Florida. And finally, simplifying our facilities and our footprint to manufacture our products in a more integrated, more flexible, more automated and ultimately more sustainable way. These successes and many others provide a great platform and we have resourcing the whole Luxfer team to continue to build on this platform to deliver long-term profitable growth. Now, I would like to discuss one of the key tools that will enable our future success, the Luxfer Business System. Please turn to slide 12. On our last call we talked about the…

Thank you. [Operator Instructions] Thank you. Our first question will come from Chris Moore with CJS Securities. Your line is now open.

Good morning, guys. Thanks for taking couple of questions. So, you -- good morning, you talked about kind of early signs of softness in Europe affecting Gas Cylinders and graphic arts. I was hoping maybe you could go just a little bit further there?

Yes. Thank you, Chris. Good talk to this morning. Yes, those would be -- those would be the two areas in Europe that have impacted our outlook [indiscernible] a little bit. So in the Gas Cylinders business with specialty gas industrial market that can go into some electronic applications and some environmental applications, as well as some calibration gas applications, we've seen reduction in the order intake over the last four or six weeks there. And then on our roll product side for the graphic arts, we've also seen lower bookings there for quarter four. Now that's balanced for certain extent by some stronger orders now coming in on sort of our magnesium products, SCBA cylinders and on alternative fuel, but yes, we're seeing some early signs of slowing in Europe.

Got it. Helpful. So it looks like pricing still in catch-up mode in Gas Cylinders, as you talked about constrained by contractual pass throughs. If I heard correctly you will start seeing improvement there in Q1, is that right?

Yeah. So we're passing through our material cost increases to customers wherever allowed by contracts and agreements. And I think you'll have seen overall 99% year-to-date of our cost increases have been recovered. So we're encouraged by that. In Gas Cylinders, I guess, two different elements to this, European business where we tend to have more spot business. And here we've just come through our latest round of increases on both aluminum cylinder and alternative- fuel cylinders. And then at the composite business where we do have some spot business where price has already moved. And some customer agreements that we're navigating and a decent-sized segments of business where we realized carbon pass throughs in January of 2023. All of which is communicated to customers, so that's helpful. As I think we discussed before, we don't fully catch-up until carbon prices normalize, by which, I mean, carbon prices stop increasing and perhaps even decreasing. But overall, yes, 99% year-to-date of our cost increases have been recovered across the business.

Got it. I appreciate that. Last one from me is just -- you had previously discussed the target of $2 plus adjusted EPS by 2025, today's presentation just characterize it more as a long-term adjusted EPS goal without specifically saying ’25. Anything that we should read into that?

We certainly remain committed to the 2025 goal and to the -- and at the $2 EPS level. So, no change to that, because we are conscious of the macroeconomic changes that we're seeing at the moment and we're thinking carefully about 2023, but we still at this time expect to deliver the $2 EPS in 2025. Thanks for the clarification on that Chris.

Got it. I will leave it there. I appreciate it, guys.

Thank you.

Thank you. Our next question will come from Phil Gibbs with KeyBanc Capital Markets. Your line is now open.

Hey, good morning.

Hi, Phil.

In terms of Europe, can you just remind us what your total revenue exposure there in terms of your -- just as a percentage of overall sales? And then, I know you also have a decent amount of production within Europe as well, so maybe kind of frame-up how we should be thinking about the production footprint in light of all the energy price increases that we've been seeing in the region? And how you're managing through that?

Yes. Thanks. So in terms of our revenue breakdown, a little over 60% in North and South America, little over 20% in Europe and a little under 20% in Asia. Obviously, that varies over-time, but that's typically how you see our revenues. In terms of our manufacturing footprint, the weight of our footprint is in North-America, two facilities in UK, one of those, the Nottingham plants making aluminum cylinders and assembling alternative fuel systems. And then our Elektron plants involved in both making magnesium and zirconium. So that's the footprint. Steve, anything to add on that.

No, I think that's fair enough. Did you also have a question, Phil, on energy cost.

No, just in terms of those two assets in the UK in terms of how you're managing through the energy cost escalation there, at least in terms of what we're seeing broadly, if you're hedged or [indiscernible] you've got some other things going on to manage through that?

Yeah. I mean, clearly on energy we're keeping a close eye on the market and we do have an opportunity, especially in Europe to do some hedging. So we will project forward up to two years in terms of our energy needs as we see them in Europe. And we can forward by up to a 100% or potentially even more of our needs and then obviously sell back if we over buy, but we’ll keep an eye on the forward prices and if we see a price that suits them we will lock it in, but there is a certain amount that will stay on spot. In North-America we’re more into on-contract and those contracts certainly run -- they are current at the moment, but some of those come to an end sort of early next year and then we're obviously in negotiations for new deals. And there will clearly be some uplift in cost over and above what we've been paying to date.

Okay. And then as we look at the net working capital in Q4 typically seasonally it's a release and I think you may be pointing to that. How much of a release should we expect if that's the case for Q4? And then second question within their -- within the cash side is, is cash restructuring you mentioned $10 million for the year, how much of that has to be let out in Q4? Thank you.

Okay. Yeah, the first point, so yeah, you've obviously seen our working capital remains elevated. And as I said in the prepared remarks. That’s very much in investments in inventory which continues. We've always said that the supply-chain is continuing to be challenging, we would – we’d keep that, we would envision that level being elevated. We are still seeing those challenges. So hence it's not come down, in fact it's gone up sequentially. We would expect it to come down to, I said, 23% to 25% of annualized revenue in the fourth quarter. I think that's a reasonable expectation, it will free-up some cash. Although I think we're not going to start making significant cash contributions and inroads into our current net debt level, probably until quarter one next year. And even I think if supply chain conditions don't normalize in quarter one, I expect quarter one to be better than quarter four in terms of cash generation. Sorry, the second part of your question.

So the cash restructuring you outlined in your deck, how much of that is less than Q4.

It’s about $1 million to $1.5 million we're expecting to go through in quarter four.

Okay. Thanks so much.

Thank you. [Operator Instructions] Our next question will come from Chip Moore with EF Hutton. Your line is now open.

Yeah. Good morning. Thanks for taking the question. I wanted to follow-up on potential recession scenario that you talked about. It sounds like you have some levers you can pull it if the environment does take a turn for the words. I guess, how do you balance any of those near-term uncertainties versus the medium term demand that you see in the horizon?

Yes. Thanks, Chip. Good morning. We have built a recession case scenario into our median term planning as an option. That was quite advanced, it’s is not completed yet and of course we're seeing volatility in upcoming indicators at the movements. Whatever happens, I think we're probably preparing for that and we like the mix in our portfolio and the strength on our balance sheet. So we're very conscious [indiscernible] to market developments. At the moment though, we like where our order book sitting. We have a good order book for quarter four, most of our markets are booking well into quarter one and quarter two. So we're pleased -- we are pleased about that. We like what we're seeing next year, particularly magnesium alloys, in SCBA cylinders, we expect alternative fuel to continue some of the momentum we picked-up in quarter three. So we like what we're looking at in the order bank, we're just making sure that we're not [indiscernible] to what's happening in the outside world. But approaching 2023 I think and beyond with the spirit of optimism.

Perfect. Thank you, Andy. It is a follow just on innovation. In terms of the new product pipeline maybe you can kind of walk us through what to expect there over the next 12 to 24 months? And then look-back at some of your more recent areas that you're excited about, how those are progressing?

Yes. So, it's been exciting over the three months to be reviewing the commercial opportunities that we're seeing with the new products. Thanks for the chance to comment on that. I think some of the things I'd like to highlight would be, maybe our zirconium solutions for electrolyzers and fuel cells, the magnesium electrode technology for rechargeable batteries. And pleased with the progress on the [indiscernible] alloys for light weighting and high-performance automobiles. The pharmaceutical zirconium products that we have find some good use in the growing medical application. We're starting to replace some of our old aramid Aerospace Cylinders with lighter weight carbon visions. The type three hydrogen cylinders are doing well with fast filling ethylene technology, magnesium roll products unitized through Russians [indiscernible], I could go on and on and on. I really like where the business is doing on some of the new kind of development.

That’s pretty clear. And just a last follow-up on that. Just in terms of flexibility, you're very flexible, you've been active on the buyback and the leverage is quite low. M&A, are you seeing more on the bolt-on side, maybe in some of those innovated areas that we're taking more organic. Thanks.

Yes to both of those. And so our pipeline remains active. We're seeing some evidence, I guess, of slowdown in transactions done in the market. We remain engaged, we visited a potential target a couple of weeks ago, we've got a meeting coming up next week, but nothing imminent, all early-stage. Valuations seem to remain pretty high and we've not yet seen much of a multiple correction. I would expect that to change, but we do remain selective, especially given the macro uncertainties. So I'd say, we're active and alert the possibilities, but we continue to prefer reinvestment in organic growth as the best use of our capital.

Got it. It makes sense. Thanks very much.

Thanks, Chip.

Thank you. This does conclude today's Q&A. An encore recording of this conference call will be available in about two hours. And a link to a recording of the webcast will be available on the Luxfer website at www.luxfer.com. Thank you for joining us today. The next regularly scheduled call will be in Q1 of 2022 when the company discusses its fourth quarter 2022 financial results. This ends the Luxfer conference call. Have a great day.