Welcome to the Luxfer's First Quarter Earnings Conference Call. We will first hear from Chief Executive Officer, Brian Purves, who will provide a market overview; followed by Group Finance Director, Andy Beaden, who will review financial performance for the quarter. Brian will then return to sum up and offer an outlook.

After that, Brian and Andy will be glad to take your questions. .

[Operator Instructions] We will now turn the call over to Brian Purves. .

Thank you, and good morning, ladies and gentlemen, and welcome to the Luxfer conference call on the first quarter of 2014. I will take you through the summary results and the market situation and then, Andy will go through the detail of the financials. .

Trading during the first quarter was mixed, with the Elektron materials business reporting some modest increases in demand and shipping a higher-than-usual quantity of industrial catalyst products. The cylinders result, however, partly due to the market issues flagged in March, was depressed.

Our overall revenue was modestly up on Quarter 1, 2013, but the mix of sales and incremental costs net of the profits are down. Adjusted fully diluted EPS of $0.28 was $0.04 below the consensus forecast for the quarter. .

Looking at the sales revenue movement, Slides 5 and 6 track from the 2013 first quarter result at the top of the schedule through to the 2014 result at the bottom. .

So looking first at the Elektron on Slide 5. The comparison year-over-year is increasingly less affected by the rare earth surcharge, which is now only $2.3 million lower than prior year. We have started the process of eliminating the surcharge altogether, building it into the base price of the material.

Stripping out the surcharge and also exchange rate movements, underlying sales are higher by $4.3 million or 8.5% versus a year ago.

Perhaps, $1 million of the increase is in one-off industrial catalysis sales, and the increase is net of perhaps $1 million loss of military powders sales, due to the outage at the countermeasure flare customer facility that occurred in late February.

But the net improvement is spread over several markets, including aerospace alloys and photo-engraving plate. .

Looking at Slide 6 on cylinders. Cylinders had a weaker quarter in terms of overall demand. Net of exchange rate movements, revenue was down by $3.8 million or 5.6% on last year, with continuing lower levels of activity in our European aluminum facilities. An expected demand for composite SCBA cylinders in the U.S.

was held back by the delayed NIOSH standard approvals, while alternative fuel sales were dominated by the shipments of modules for the Australian virtual pipeline contract, with a lower-than-usual level of vehicle conversion business taken on.

We strongly believe that the underlying demand for SCBA kits, mainly for firemen's breathing apparatus, is currently very strong in the U.S. But the requirement to retest all the new 2013 standard kits is reported by our customers to have caused a frustrating deferral of equipment purchases, quite outside their or our control.

The SCBA or life support market is our single biggest market sector, with nearly $60 million of mainly composite cylinder sales in 2013. .

Two of our breathing apparatus customers have announced that certain kits have now been approved, but we are aware that other kits and other manufacturers are still awaiting approval.

Accordingly, we may see some pickup during Q2 as customers start to ship the new sets, but a full recovery and any catch-back of deferred cylinder sales is likely to be over Quarter 3 and Quarter 4. .

Turning to Slide 7 on strategic growth projects.

In alternative fuel cylinders, while there remains much excitement over the future prospects for compressed natural gas, particularly to power Class 8 trucks in the U.S, the quarter saw a lower level of activity in both North America and Europe, where during the quarter, we also lost some sales into the Turkish bus market, following a price increase to 1 customer.

This increase had been applied to the rest of the market on the acquisition of Dynetek, but on this contract, we were inhibited until the start of this year by contractual commitments. .

These things do happen, and we are committed to maximizing the price for what we believe to be premium products, even if that means occasionally losing a piece of business. .

We announced our range of Type 4 cylinders at the Alternative Clean Transportation or ACT Expo in Long Beach this week. Although only 1 derivative is currently on sale, with the bulk of the range still under development, we expect to be in the market with the 26-inch product, manufactured at our new Utah plant during the third quarter. .

On gas transportation modules, our total alternative fuel sales in the quarter of $14 million were dominated by shipments under the Australian virtual pipeline contract previously announced.

Encouragingly, the publicity around that contract hardly elicited a good deal of interest in the Australian market, and we are being asked to quote for other opportunities in the mining sector there. .

Luxfer GTM Technologies, our joint venture in North America on bulk gas containers, also launched new products at the ACT Expo, targeted at servicing the requirement for smaller quantities of gas being hauled to remote locations by pickup trucks. .

On magnesium in civil aircraft, we exhibited at the Aircraft Interiors Expo in Hamburg last month, the first time that we have had the opportunity to do so since the FAA announcement on the possible use of magnesium alloys.

And there was a great deal of interest in our exhibits and in those on the Zim Flugsitz stand, which included some of the Elektron alloy parts being used in their magnesium-containing seats, which were announced in March.

As promised, the FAA has now published on their website the laboratory scale flammability test for magnesium alloys used in aircraft seat construction. All 228 pages of this document can be accessed by putting FAA and then TC-13-15 -- sorry, -52 on Google. .

Meanwhile, we continue to work on ways to improve the so-called buy-to-fly ratio by, for example, water jet cutting plate material into shapes nearer to finished component form. .

Although not on the slide, we have also achieved a further small step towards our IOS oxygen delivery system, with the approval of our quality system at our U.K. cylinder plant to the ISO 13485 medical devices standard. .

Andy will now take you through some of the financial details. .

Thank you, Brian, and welcome everyone to the call..

Brian covered the divisional sales analysis and my first slide, Slide 9, shows how that consolidates into the group revenue changes for Q1. Total revenue was $123.3 million for Q1 2014, with net revenue of $122.4 million, and the rare earth chemical surcharge was only $0.9 million.

The group's underlying revenue was up 0.4% or $0.5 million, excluding surcharge changes and adjusting out for the positive $2.7 million FX translation difference, with Elektron's increasing net revenue offsetting the disappointing fall in gas cylinders revenue. .

Slide 10 shows trend in sales for Q1 2014 by geographic region. You can see that the total sales are slightly up. Europe and North America are both down in Q1 2014 compared to Q1 2013, with Asia-Pacific sales up dramatically as a result of the CNG virtual pipeline contract sold to Australia. .

Turning to the trading profits result in Slide 11. Brian talked through the factors affecting revenue and sales changes in the quarter. Gas Cylinders trading profit for the first quarter of 2014 was $1.6 million, a decrease of $3.6 million or 69% from the $5.2 million trading profit for the first quarter of 2013.

In addition to the total divisional sales revenue being down in the quarter, we have an adverse mix of sales compared to Q1 2013 as a result of lower composite cylinder sales for self-contained breathing apparatus and large aluminum industrial gas cylinder sales for specialty gas containment.

We are also incurring costs for product development and marketing of new products in the AF and medical markets. Elektron's trading profit of $10.7 million in Q1 2014 was $1 million higher than in Q1 2013. Sales margins were generally stable, and the profit increase was because of stronger sales in the quarter.

The trailing profit margin was slightly improved at 18.7% compared to 18% in Q1 2013, are the results of better utilization of the European plants on the back of stronger sales demand. The group's average margin fell to return on sales of 10%, from 10 -- from 12.2% on the back of reduced profits in Gas Cylinders.

For Q1 2014, group trading profit was, therefore, $12.3 million versus $14.9 million for Q1 2013. .

Turning to the full income statement on Slide 13 -- 12, the gross margins were slightly higher with Q1 2014 at 23.4% versus 23.1% for last year. Gross profit was, therefore, $0.6 million higher at $28.9 million. But with administration and distribution costs being higher, trading profit overall was lower.

Admin and distribution costs were higher because of the increased activity in terms of marketing, IP and product development in both divisions, with a lot of activity going on, on the strategic growth projects in the quarter. We did not have any restructuring exceptional costs in Q1 2014. .

Operating profit, which is after restructuring and other exceptional items was, therefore, also $12.3 million versus $14.5 million for Q1 2013. In Q1 2014, we did charge $0.2 million of costs below operating profits in relation to the acquisition of the new Utah facility, which we have written off under IFRS. .

The notional IAS19-retirement benefit finance charge was $0.7 million, $0.2 million lower than Q1 2013 as a result of reduced pension deficits. Interest cost relating to our debt facilities was $1.4 million versus $1.5 million last year. And the effective tax rate was 28% versus 31.4% last year.

Net income for Q1 2014 was $7.2 million compared to $8.3 million for Q1 2013, but adjusted for exceptional items and excluding the IAS19 finance cost was $8 million, and this is $0.30 per ADS. The fully diluted equivalent was $0.28. For reference, adjusted EBITDA was $16.9 million compared to $18.7 million for Q1 last year. .

The next slide, #13, shows the consolidated balance sheet. Overall invested capital in the operating businesses was $239.7 million net of the pension deficits of $74.1 million as at the 31st of March 2014. The pension deficits increased by $6.5 million from the $67.6 million at the end of 2013.

This was mainly due to lower corporate bond yields, which are used to discount the pension liabilities and, therefore, increase their present value and the deficits in the U.K. and the U.S. .

Net assets or shareholders' equity of the group fell to $190.2 million, down $1.5 million from the end of 2013. Net debt, debt minus cash, was $45.6 million. Our revolving credit banking facilities remained undrawn in Q1. And in the quarter, we announced their extension to April 2019 and their increase in size to $150 million of committed facilities.

The movements of the balance sheet are shown separately in the slide for the acquisition of the Type 4 AF composite facility in Utah. .

Turning to cash flow on Slide 14. Our operating cash flows in Q1 2014 were a positive $1.3 million, down on Q1 2013's $9.6 million, as a result of lower profits and higher working capital.

The working capital increased due to a number of factors, but the launched virtual pipeline contract in Australia did add at least $5 million to working capital in the quarter. Investment cash flows were a spend of $6 million in the quarter. We invested $6.4 million in Q1 2013.

CapEx in property, plants and equipment was lower at $3.1 million versus $3.9 million in Q1 2013. The upfront cash paid in March to buy the new Utah facility was $2.7 million. .

Cash flow before financing was, therefore, an outflow of $4.7 million compared to an inflow of $3.2 million for Q1 2013. After paying dividends and interest of $3.9 million and the additional arrangement fees on the extended bank facilities of $1.3 million, net cash flow for Q1 2014 was an outflow of $9.9 million.

Net cash at the end of the quarter was therefore $18.5 million. .

The next slide shows return on invested capital. The lower profits in the Gas Cylinders Division and the higher working capital, as I highlighted earlier, have impacted both the numerator and denominator in the calculation with the ratio being low for the quarter at 15% return after-tax. The last 12 months average ratio was 20%. .

Thank you. I'll now hand you back to Brian to sum up. .

Thank you, Andy. In summary then, we had a decent quarter in the specialty materials side of the group, with good sales of industrial catalysts offsetting the shortfall in military powders and progress being seen in a number of key markets.

Gas Cylinders, however, is currently being held back by some market issues in North America, while European demand remains generally weak. Additionally, we are incurring heavier-than-usual development costs in that division. .

On the outlook, the headwinds seen in quarter 1 are likely to persist in quarter 2, albeit the SCBA issue could well lessen, while the countermeasure flare issue is likely to be worse because of the partial impact on Q1. .

Overall, we remain positive about the outlook for both divisions during the second half of 2014. But by the time we get through quarter 2, it is likely that there will be insufficient time to catch back the shortfall that will have appeared in cylinders' results. .

We're basing our market views partly on public statements by our customers on how they see their year shaping up. The heavy expenditure and product development costs will continue during quarter 2 when, additionally, we will have the start-up costs at our new Utah facility.

But our focus is on delivering the medium- to long-term potential for the business. There's a lot going on in the alternative fuel sector at the moment, and there's little doubt that the market is currently overcrowded and needs to see some of the predicted growth in demand to balance things out. But here again, we should take a long-term view.

If the use of compressed natural gas grows in the way that it is generally accepted to, the shape of the market and the supplier base is likely to change, and the focus will switch to reliability, volume capability, strength and innovation and customer service, all factors that we believe will strengthen our hand, particularly once we have, as we intend to, the broadest product offering into the sector covering both Type 3 and Type 4 products.

.

Thank you, and we will now take questions. .

[Operator Instructions] Your first question comes from the line of Luke Folta with Jefferies. .

So I guess firstly, on the cylinders. I mean, you had had a forecast out there previously as of last quarter that we could potentially see something like $70 million to $75 million in sales in that business this year.

I'm just curious, what -- like what events transpired that, I guess, changed the view in the outlook for that sector over that time period? And could you, I guess, give us your updated views on what you think -- what the opportunity might be for you this year, with the new capacity ramping?.

Just to clarify, you're talking about the alternative fuel element of the division?.

Yes, that's right. .

Yes. Well, we are actually not down on our alternative fuel revenues in the quarter. In fact, it's the best quarter that we've had, I think, ever in alternative fuel. It's just that within that, it's dominated by this big contract that we have.

And the underlying level of demand that we've seen in the vehicle conversion side has been somewhat lower than in the previous 4 quarters. But our top line revenues actually are better than any quarter in 2013. So we still think -- have a reasonable prospect of certainly beating the revenue that we achieved in the AF sector last year.

I'll be a little circumspect about quite how much we'll beat it by because I think, to some extent, it's going to be dependent on whether or how many of these larger contracts we win in the balance of the year. Now there are, I think -- there's a shortfall in the market at the moment.

And in part, that's driving a few pricing issues, so we do have to figure that we may have to give something on pricing to win back some of that volume, but we do have other work in hand to -- on more contracted business in the vehicle conversion side to boost the revenues in the balance of the year.

So I certainly would be a bit, probably reluctant to repeat the $75 million as of today but I still think that we can exceed last year's number and possibly get quite close to that, but we've got a lot of work to do between now and the end of the year. .

Okay.

All right, and then just a follow-up, can you talk about what the cost impact was from some of the product development and other, I guess, launch activities that you're doing in the cylinders business? And then also, what sort of drag should we expect from the Utah facility in the second quarter?.

Yes. I mean, in the cylinder side, we're certainly incurring some quite hefty costs on the IOS project, and I have mentioned the quality standard that we achieved in the quarter. It takes a lot of time and effort and consultancy to get to that position. There's a lot of physical development work going on.

And the Type 4 product that we are developing at the moment, again, there's a lot of cost and effort goes into that, and we are trying to develop a fairly broad product range in a fairly short period of time. And normally, in the business, we would be developing new derivatives only occasionally.

And each time you do it, there is a significant cost associated, including with the testing regime and getting the various approvals required. So that's going to be quite hefty in quarter 2 as well. But as I said, we expect to be starting to produce and sell some of that range in the third quarter. So the cost will reduce Q3 and Q4 onwards.

And between those 2 elements alone, we're certainly talking, I think, $1 million in the quarter. The facility in Utah will be a few hundred thousand dollars in terms of its cost before we get it into production and start to recover the overheads. Of course, we bought that quite late in -- well, in the first quarter... .

And then, it just went through the deal in March finally. .

Yes, so there's very little impact to quarter 1. But quarter 2, we'll be picking up the net cost of that business and reorganize to get ready for the production to start at some point in Q3. So it will be several hundred thousand dollars on top of the development cost that we talked about. .

[Operator Instructions] Your next question comes from the line of Phil Gibbs with KeyBanc Capital Markets. .

My question was on the cylinder side, just on the year-on-year comparison and 1Q to 1Q. You talked about the European, I think it was more of an overhead absorption issue in industrial. The SCBA weakness as far as it impacted the mix, and then you just noted product development was about 1 million.

I just wanted to see what the impacts of those 3 things were, as an order of magnitude the biggest hit on the business?.

Well, if you -- the European market, as you know, has been pretty depressed for aluminum cylinders. But the industrial cylinders is the one which hurts us the most because they're big specialty cylinders, good margin business, and it's very much at the top end of the margins on the aluminum side.

And the first quarter sales into the industrial sector and Europe were the lowest that we've seen really since the recession 2009. And just trying to explain why that is, we've had the occasional comment from customers in their results about cutting back on capital investment. And for them, that's what this is. This is a capital asset they buy in.

And so that sector alone was $2.5 million down on prior year. And the sort of margins we make on it, that's a significant impact. So that was probably the single biggest effect. SCBA is a big, big market for us. And again, within composite cylinders, it's at the higher end of the spectrum on return.

And so the fact that we've had a deferral of sales in the quarter does hurt. And on that one, at least, we do think have a prospect that, that will be recovered because we do think it's a deferral of sales. And once the new generation kits and new standard kits are out there, then sales will be increasingly good as we go through the year.

So we are expecting some catch-back of that one in the third and fourth quarter, albeit that we are still subject to capacity constraints on that side with the capacity improvements that we have announced on the portable cylinders, not really coming into effect until towards the end of the third quarter. .

Okay, so maybe, is it fair to say that they all can be -- the European piece that the SC -- the European industrial piece, the SCBA and the product development could all be $1 million headwinds in themselves year-on-year?.

Yes, okay. .

And then just as a follow-up, as we head into the second quarter here, sounds like industrial catalysis potentially a little bit weaker, defense piece a little bit weaker.

Fair to say that Elektron is down a little bit quarter-on-quarter and cylinders potentially rebounds a little bit because of the SCBA?.

Well, I think, we're certainly expecting to have some improvement in SCBA. But quite how much and when, we're still not sure about. The -- and we will have the Utah facility cost coming in, which will pull cylinders back. So I don't think we're looking at a great deal of change net-net Q2 over Q1.

There will be a few pluses and minuses, but we think Q2, there's no particular reason why net it should be much different from Q1.

But there are quite a number of things that we think will fall away after the second quarter, and there are -- at least one thing, which is the SCBA, which should start to reverse and give us a higher-than-expected sales in the second half of the year.

The military powders side, the latest news I have on that is that the customer has restarted production in a very low-key way and is just absorbing some stock to test this new process. So I think we do expect that to be back in production in the third and fourth quarters, albeit that the market is anyway depressed as we've reported previously.

So I think, all in all, turning back to what we said in the document, the Elektron side, we think, we see fairly steady improvement over prior year, and we're relatively comfortable with that over the course of the year.

But with cylinders, by the time we get to the half year, we are going to be quite a bit down on prior year, and it's just looking a major challenge to pull that back in the remaining months of the year, particularly given the fact that Q3 and Q4 contain a number of holiday periods which always tends to affect the revenues. .

[Operator Instructions] We do have a follow-up question from the line of Luke Folta with Jefferies. .

Can you talk about what the impact of the Chemcat order was on 1Q? Understanding you might not want to get overly specific on it, but I'm just trying to get a sense of what the quarter-over-quarter comp could be associated with that. .

Yes, it's not huge, Luke. I did actually say in the revenue variance that about $1 million of the -- the catalysis sales in Q1 were about $1 million higher than our average rate. And I was just saying that, that isn't necessarily going to be the case every quarter this year.

We're still -- they're still pretty lumpy, so occasionally we get good quarters, and Quarter 1 was a good quarter. But we're not necessarily counting on that. But there is an underlying level of industrial catalysis there that we're seeing quite regularly. It's just that quarter 1 was about $1 million higher than the average rate.

And of course, you have to then apply a margin on that. But it is a pretty good margin product in common with most of the Elektron materials. .

Okay. And then I guess back to alternative fuels, when you look at market conditions currently, is it more a function of the demand growth isn't quite what you expected to be so far this year, or is it more a function of more capacities come in and there's -- I guess, your share of it is less than what you had initially thought.

Understanding you're still growing the business, but just relative to against your prior expectations. .

I think the market -- to my best knowledge, the market is quiet in Quarter 1, and we've had a number of people say that to us. So although everyone is very much of the belief that the market is on a long-term high growth curve, quarter 1 was pretty quiet.

And then within a fairly quiet market, there was a lot of price competition for what was available, and we did lose some market share because we walked away from some of that price competition. So I think it's a combination of a couple of things. We do expect the market to come back and be much stronger in the second half of the year.

And we do expect to recover some of that market share. But of course, at the moment, we are only selling the Type 3 product into that market, the metal-lined product, which is more heavily focused towards the bus market than the truck market.

And the truck market is -- and I suppose is increasingly switching towards Type 4 product, and we need to have our Type 4 product in the market to be able to win a decent share of that business. .

Okay. And I know it's difficult to expect, I mean, in a growing market like this, capacity expansion to exactly match new demand growth. And I'm sure it's going to be lumpy over time. There's going to be periods of tightness and periods of looseness like we saw.

But this current period, do you think it's a function of -- I mean, when you talk to customers on this, is it a function of maybe there's some inventory built last year and now they don't necessarily need the order at the moment and they could be back later, or is it just the demand of run rate at this point isn't -- it just isn't high enough to support a larger inflection?.

I'm struggling really to give you much more than I have. There's certainly been no mention that's been mentioned to me about high stocks. I mean, it's actually been the -- the comments I've relayed have been relayed third-party from converters who are saying that the market is quiet. They are not getting the business.

So it's not that the converters have a lot of stock on their hands or are not buying from the cylinder manufacturers. It's that there were fewer vehicle conversions being undertaken in the quarter and, therefore, the requirement for cylinders in aggregate was lower. And for what demand there was, there has been a lot of price competition.

And there's been quite a few switches in sourcing during the quarter driven by that. .

Understood.

Okay last one, just on European auto, not sure how long of a visibility that you have there, but are there any comments from your customers or indications you're seeing out there that supports a better second half versus 1 -- first half?.

Well, in terms of European automotive which is where we really had the issues, we're not -- we haven't sold much more into the auto cat market than we did 1 year ago. But we do sell into the market various ceramic products which are used in things like oxygen sensors in vehicle management systems.

And sales of those have been rising over the past few months. And when we talk about leading indicators which make us think that the market is on its way back, it's really that, that we're referring to. Of course, there are all the external analyst forecasts out there that say that the market is in recovery.

But that's the more concrete evidence that we have that the market is picking up. And we see these ceramic sensors for the engine management systems as being a bit of a leading indicator. So our sales of those are up at the moment.

Just as yet, our auto cat sales are not, but we do think that we have a reasonable prospect for seeing an increase in that in the back of the year. .

Your next follow-up question comes from the line of Phil Gibbs with KeyBanc Capital Markets. .

I'm pretty much all set. Luke asked about the European automotive situation. I think you guys addressed that pretty well.

Just had a -- just was curious, are you guys on the JSF at all in any of your products?.

A little bit. Yes, we do some of our Superform products go into the JSF. It's not a big revenue exposure though. .

Okay.

I was just curious if that was picking up at all or that was still sort of in the low -- the low-rate production?.

Yes, it's not a big exposure at the moment. We probably get a little bit of magnesium on it as well. The Typhoon or the Eurofighters are a bigger exposure today, and that is stable at the moment because the production has been stretched out.

But they're kind of hoping to win more export business with that one, and we'd like that to happen because certainly, otherwise, middle of 2015, I think they'll run out of business. .

At this time, there are no further questions.

Gentlemen, do you have any closing remarks?.

No, that's fine. Thank you, ladies and gentlemen. We are at this point in the quarter 1 results. But the majority of the effect is the sort of issues that we flagged in the call in March. We do expect the majority of those effects still to be there in quarter 2, but the underlying momentum will be restored, we believe, in the second half.

So thank you much, and we'll speak to you again in 3 months' time. .

Thank you. An encore recording of this conference call will be available in about 2 hours. To hear the recording, please dial (800) 585-8367 in the United States. In other countries, call (404) 537-3406. This information will also be available on Luxfer Group website at www.luxfer.com. Thank you for participating in today's conference call.

You may now disconnect your lines at this time..