Good morning. My name is Shelby, and I will be your conference operator today. Welcome to Luxfer's Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] Now I will turn the call over to Mike Gaiden, Vice President of Investor Relations and Business Development from Luxfer. Mike, please go ahead.

Thank you, Shelby. Welcome, everyone, to Luxfer's fourth 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 fourth quarter and full year 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 2 of today's presentation for further details. Now I will turn the call over to Andy for his summary comments on the quarter and our outlook, after which Steve will provide details of our financial results and 2023 guidance. Andy will then provide a longer-term view before Q&A. Andy, please go ahead.

Thank you, Mike, and welcome, everyone. Please turn to Slide 3. I'm pleased to share with you highlights of our fourth quarter performance, which includes growth in sales and in adjusted EPS. The Luxfer team once again stepped up to deliver for our customers, in turn, helping us to realize full year earnings per share in line with guidance. I'm grateful for our team's ongoing focus and dedication. I'm particularly pleased to report that volume growth accelerated in quarter four to $9 million with both Elektron and Gas Cylinders posting their best volumetric performance of the year. This strong quarter four reinforces our confidence in our long-term plans for profitable growth. We saw higher input costs once again during the quarter, and we continue taking actions to pass through these changes wherever allowed by contract, including additional increases at Gas Cylinders. Overall, though, higher costs and some operational disruptions limited the profit uplift from our incremental sales. Our executional focus helped us to translate our higher sales and earnings into expanded free cash flow and the $15.9 million generated in quarter four exceeded our expectations. Looking ahead, we are seeing softness in European demand in areas where customers are destocking. However, we're also driving important orders in some of our focused areas of growth, including aerospace, defense and hydrogen vehicle systems. I would now like to turn to Slide 4 to provide a brief update on the encouraging secular growth trends driving our business. During the fourth quarter, Gas Cylinders posted its best alternative fuel performance of the year. Capitalizing on increasing interest in green energy, we executed successfully on elevated demand for our lightweight composite cylinders for the bulk gas transportation of both hydrogen and CNG. Additionally, a step-up in passenger car manufacturing, coupled with ongoing stringent particular emissions…

Thanks, Andy. I'll begin on Slide 6 of a summary of our performance by end market. I'm pleased to report that we experienced growth in each of our end markets during the quarter. In defense, first response and health care, we realized 19% growth on the back of strong military demand. Defense aerospace alloys, flameless ration heaters and chemical kits propelled our increased sales in this end market, while first response and health care held largely steady. Transportation sales rose nearly 24% with all subcategories higher. Both auto-catalysis products and our RotaMag performance wheels alloy benefited from strength in the automotive market. Alternative fuels realized a second consecutive quarter of acceleration, amid ongoing commercial adoption of hydrogen for transportation. Commercial aerospace also contributed meaningfully to sales growth. General industrial sales expanded 13%, helped by demand for SoluMag as well as commercial applications for magnesium powders and zirconium for industrial catalysis. Graphic arts sales of magnesium plate slowed, however, which was influenced by competition and macroeconomic conditions, particularly in the consumer sector. We're encouraged by these sales results, which reflect the unique attributes of our product portfolio as well as the long-term attractiveness of our end markets. Now please turn to Slide 7 for a summary of our fourth quarter financial results. Fourth quarter sales of $116.7 million rose $18 million or 18% from a year ago. This growth came from both $9 million of positive contribution from volume and mix as well as $13 million of price actions to offset rising input costs. Excluding $4 million of adverse foreign exchange movements, our underlying sales grew 22% on a constant currency basis. Consolidated adjusted EBITDA in quarter four decreased $0.6 million or 4%. Despite our actions to pass through inflation, cost increases of $13.6 million in the quarter offset our pricing…

Thank you, Steve. I will now provide an update on two key areas of focus: our path to $2 in adjusted earnings per share, and how that goal is supported by implementation of the Luxfer business system. Please turn to Slide 11. To advance to our long-term EPS goal, our pathway includes three key aspects. We target $0.33 from profitable organic growth. We expect both new products and growing secular demand in key areas of our business to drive these incremental profits. This will include further development of the hydrogen market, which for Gas Cylinders remains the largest source of potential growth over the next several years. Within our Elektron segment, we expect to drive success in newer commercial products in both magnesium and zirconium, along with expanded military products from Magtech solutions. Additionally, the return of more normalized operating conditions in the European industrial sector relative to the current 2023 baseline should also contribute. We anticipate another $0.29 from margin recovery. The Gas Cylinders business in particular has been impacted by outsized increases seen in carbon fiber, energy and labor costs. Our expectations are for a period of stability to emerge in these areas, which will provide an opportunity for margin recovery. We will also benefit from structural cost savings in both our powders and Gas Cylinders businesses. In addition, we expect $0.13 of uplift from lower legal and finance costs, including the end of the currently elevated legal charges that Steve outlined. As a leadership team, we hold a clear line of sight to this $2-plus EPS goal, all across the business, we are actively working towards its attainment. The Luxfer business system is one of the key tools that we are employing to deliver both growth and customer satisfaction. Please turn to Slide 12. On our last…

[Operator Instructions] And we'll take our first question from Philip Gibbs with KeyBanc.

Hi, good morning.

Good morning, Phil. How're you?

Good. Can you talk a little bit about the legal and tax and interest that you're speaking of, specifically. I mean, I think you started off by saying underlying EBITDA is similar year-on-year in Q1, but then you have these other items. So maybe just talk to those things?

Yes. Thanks, Phil. I'll take that. Yes, first of all, the legal, I mean, obviously, we can't go into too many details about the case itself over and what's disclosed in our 10-K. But in terms of cost, yes, so it basically picked up a little bit in the year. In quarter 4, we saw in excess of $1 million. So we're expecting that run rate to continue throughout 2023. So you can see there at least $4 million of legal cost. Interest, I mean, there's two factors there. Clearly, the level of borrowing that we have is slightly elevated at the moment because the interest rates are higher. So we're paying around about 6% to 7%, our incremental borrowing rate, which is historically quite high. So basically, that will be driving a higher interest cost. Clearly, as we generate free cash flow, and we're expecting to do so through this year, then our borrowings are going to come down eventually. But that will have an incremental effect on - or basically, it will detract from our profitability in 2023. Finally the tax, I think we talked about tax rate before in the U.K. So it has been enacted and it's going ahead, the corporation tax rate in the U.K. is going up from 19% to 25% from April. 60%, 70% of our profits are in the U.S. So the rest is roughly in the U.K. So just taking a weighted average, that sort of drives are an increase in our ETR to around about 23% we're modeling. So combined there, you can see the sort of impact on the - on our EPS. EBITDA, as we say, underlying, excluding illegal costs, which obviously is normally a EBITDA matter. But if you strip that out, our EBITDA is around similar numbers to or we expect it to be around about a similar number to what we've had this year.

Thank you for that. And then as it relates to defense, I think you started off the call by saying that there's a good outlook for aerospace and defense and throughout things like flameless ration heaters and decontamination and military flares, but then also said that there's sort of a bit of a buying hiatus in the first part of the year. So maybe take us through the full year outlook and then the thoughts behind the timing.

Yes. This is Andy, Phil. I'll cover that. So yes, we're modeling aerospace stronger in the year, both defense and commercial. So we're pleased with the outlook there that benefits both magnesium and our cylinders business. Flameless ration heaters and chemical kits have ticked up nicely. So we're projecting a consistently strong year in those areas. In terms of the military flares, we will see those down a little in quarter one and in quarter two. That's all about the outage going on in U.S. magnesium, and as you heard, we've identified a second source of supply and additional source of supply that's approved for flameless ration heaters. The approvals are very well advanced for military flares. Indeed, some of the military flares are already approved, but these are sophisticated alloys and powders. So there's maybe one to three months still to go to approve all of those. And then we'll see that pick back up at a normalized sort of cadence as we go through the year. So broadly, yes, aerospace and defense for the year will be positives for us.

And as we think about the business in the entirety, is it fair - and maybe just excluding some of these legal costs for now, is it fair to think that you've got some price cost challenges in Elektron and then some price cost improvements with some of the new contracts you've written in cylinders, is that broadly a good way to think about it?

Maybe a little bit different to that. So we're pleased with what was achieved last year on the cost pass-throughs. I think nearly 94% of our increased costs were passed through in quarter 4. So that was good. In cylinders, last year - at the start of the year, for example, there was only 12% of the business in composite cylinders, where we were able to pass on all of our costs. That increased to about 40% as we started this year. Further contracts roll off. And by the end of the year, that's up to 70%. So some good progress on cylinders, but still some restrictions in place. In Elektron, we've been successful in passing through costs, as you commented. So improving situation overall.

Thank you.

[Operator Instructions] We'll take our next question from Chip Moore with EF Hutton.

Good morning. Thanks for taking the questions. So I wanted to ask about the '25 targets. Maybe if you can handicap biggest risks. I think you - you talked about maybe expecting some normalization in the European area, for example. Just curious about some of the underlying market assumptions.

Yes. Thanks, Chip. We're prepared to - we're pleased to be able to share some of the details behind that $2 EPS goal in this call. I think, overall, the goal I'd categorize as suitably ambitious and is achievable. If we think about some of the risks to that, the lowest risk must be on the $0.13 that we have related to legal and financial. I just don't see the one-off legal situation extending into 2025, and our cash generation should lead to lower finance models. I guess there's an incrementally higher risk associated with the margin improvement part of the model. We do have strong value propositions, but we recognize customers have options and competitive forces will have some impact. The highest risk in the model must be around profitable growth, market and product development offers uncertainty. But we really like Luxfer tie into secular growth. Some of the industrial constraints in Europe, we believe, will alleviate. We've got this great foundation of decades of experience in hydrogen and confidence in the magnesium and zirconium teams based on their proven track records, and we're investing to make it happen, Chip.

Perfect. That's helpful. And just to that point, just maybe a follow-up. Maybe you can expand on some of the more recent investments and some of the areas you're investing in, just in terms of newer products reception and what you're excited about on the horizon?

Yes. So we do have elevated capital investment in 2023 that we're pleased about. We're targeting $12 million to $15 million of capital investment. Just over half of that goes into the MEL Technologies, part of the Elektron business around magnesium, alloys and zirconium, maintaining our infrastructure and ensuring we've got the growth capacity we need in those areas. And then a significant part of the remaining CapEx is allocated to Gas Cylinders, including hydrogen capabilities. There are no shortage of good opportunities for investment, frankly. So we prioritize those that support our profitable growth, along, of course, with some necessary maintenance and safety and environmental related projects.

Perfect. Okay. Thank you very much.

Thanks Chip.

And it appears that we have no further questions at this time. An encore 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. Thank you for joining us today. The next regularly scheduled call will be in late April when the company discusses its first quarter 2023 financial results. This ends the Luxfer conference call.