Brian Purves - Chief Executive Officer Andy Beaden - Group Finance Director.

Martin Englert - Jeffries Eric Beyrich - Arbiter Partners Philip Gibbs - KeyBanc Capital Markets.

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

After that, Brian and Andy will be glad to take your questions. We request that you initially ask only one question. After you have heard the answer, we will give you the opportunity for a follow-up question. If you would like to ask additional questions, our operator will be glad to place you back in line. Thank you for your cooperation.

We will now turn the call over to Brian Purves..

Thank you. Good morning, ladies and gentlemen. Welcome to the Luxfer conference call on the third quarter of 2014. Looking first at Slide 4. Trading in June third quarter remained affected by disruption in some key markets while European demand generally remained somewhat depressed.

The electron materials business continues Elektron materials business continues to improve in several areas while military powders remain quite depressed and the long expected recovery in European automotive demand is still not showing up. In cylinders the important North American SCBA market is improving steadily but is still not back to normal.

And our sales of alternative fuel or AF products were particularly weak in the quarter. With the contribution from our new acquisition, our overall revenue was modestly up on quarter three 2013 but with sales below plan, incremental costs and weaker mix of sales, our profits remain down.

Adjusted fully diluted EPS of $0.24 was we recognize, well below market expectations. Turning to Slide 5. As previously reported, the acquisition of Truetech and Innotech closed on July 29. We have known these two businesses for several years, at various times supplying them with material and [the others] [ph] competing against them.

Our net estimated cost of over $60 million is the largest bolt on acquisition that we have done and the business is unlike many of those we acquired over the years, being very profitable as acquired. But we nevertheless believe that the business has good improvement potential.

In particular, Luxfer has its own intellectual property in the area of flameless heaters. And we are now looking at how best to combine both sets of IP into an improved heating device. Secondly, we are now testing our zirconia-based absorption technology in some of Innotech's chemical decontamination products.

This is going very well and I hope that we will get to the stage of first article testing on at least one product at some point in 2015. On Slide 6, you can see some of the products that we acquired with these two businesses.

One key aspect of the business is an ability to increase throughput to respond to urgent demands for additional flameless heaters and self-heating meals, as can be required to support military activity or respond to relief agencies reacting to natural disasters. This ability is very important to the key customer base.

Of course we are not forecasting either natural disasters or large-scale troop movements but I am pleased to be able to say that the underlying business is to date performing as we had expected. Turning to the sales revenue movements.

Slide 7 and 8 track from the 2013 third quarter result of the top of the schedule through to the 2014 result of the bottom. So firstly, Elektron division on Slide 7. The price of cerium is now more or less back where it was at the start of 2010 and so the cerium surcharge has disappeared from our pricing structure.

Smaller surcharges for other rare earths remain. Stripping out the surcharge and also exchange-rate movements, sales were up by 6.7%. But this is entirely due to the acquisition. Underlying sales were down by $2.6 million or 4.2% on prior year. The weakness of the countermeasure flares market is a key factor.

As of October we were advised that the customer facility where the fatal accident took place earlier this year, is now fully capable once more. But the market remains depressed. Several other markets including aerospace alloys and magnesium photo-engraving plate are up year-over-year.

Our magnesium recycling business is also well up, although the margins here are much lower than our average. Turning to Slide 8 in cylinders. The cylinder business continues to have difficulties. We are seeing a steady improvement in the sales of portable cylinders for SCBA sets. But several of our customer sets are not yet approved for sale.

In particular, MSA's new G1 breathing kit was still being shown yesterday on their Web site as approval pending despite having been expected to be approved before the end of the third quarter. A bigger issues in the quarter was a very low throughput of alternative fuel cylinders.

We were late getting our 26-inch Type 4 cylinder through development and we had a dearth of contract business with the Dallas Area Rapid Transport or DART bus contract finishing and various bulk gas contracts being delayed. Overall, alternative fuel revenue in the quarter was only $5 million compared to over $12 million at this time last year.

The order book did, however, pickup during the quarter. Better exchange rate movements, sales revenue in quarter 3 was down by only $3 million or 4.6% from last year. So you can see that the shortfall in alternative fuel accounted for more than this with other products such as aluminum cylinders and breathing.

Just updating you on some strategic growth projects on Slide 9. While we were late getting our 26-inch, neck-mounted Type 4 product into the market, we are now in production at our Utah plant and we have made our first significant sales.

With the agreement of Trilogy Engineering Systems on Western Dairy transport, yesterday we issued a press release about the supply of our new lightweight cylinders to Trilogy for inclusion in their heavy-duty truck systems and thereby to Trilogy's customer, Western Dairy, as part of the program to convert all of their trucks to CNG.

While the conversion of class 8 trucks from diesel to CNG has not progressed as fast as expected in 2014, it has grown and the economic and environmental drivers remain favorable in our opinion, for it to grow much further. So we do feel there is a profitable space for our lightweight cylinder family.

The market for gas containment modules remains strong and our North American joint venture is being relatively successful with small and medium sized units.

But to date not so successful on the largest modules where despite the, in our review inherent advantages of Type 3 based systems, the JV has often lost out on price to Type 4 systems based on larger and therefore fewer cylinders.

There are markets where the regulations favor Type 3 systems and applications where the Type 3 benefits are more valuable. And it is obvious for us to focus on those of preference. We have also have been hoping to reengineer some of the JVs larger product offerings.

Our German business has recently been successful in winning new orders for their system for quarter four and early 2015. On magnesium and civil aircraft, we hope to hear soon that the aerospace designers rulebook will be changed to allow the use of magnesium alloys without the need for the currently required special conditions exemption.

Meanwhile, we continue to supply material to a number of aerospace manufacturers and we are hopeful that prototype seat designs incorporating our Elektron alloys will start to be seen on trade shows in 2015.

On our IOS medical oxygen delivery system, although this has considerably delayed from our original targets, we are now making good progress on the design of the Smartflow module around which it is built, has been frozen to allow the IOS device to enter final testing. Andy Beaden will now take you through some of the detail in the Q3 results..

Thank you, Brian and welcome everyone to the call. Brian covered the divisional sales analysis and my first slide, Slide 11, shows how that consolidates to the group revenue changes for Q3 and year-to-date. Total revenue for Q3 2014 was $120.9 million, with net revenue of $120.5 million. And the rare earth chemical surcharge was only $0.4 million.

It was a good start for Luxfer Magtech. Achieving $6.5 million of sales in its first two months of Luxfer ownership. The group's other revenues for Q3 2014 were down 4.4% or $5.6 million excluding surcharge changes and adjusting out the positive $1.3 million FX translation.

Year to date, underlying net revenue adjusted for translation and acquisition is down 2.1% with Elektron effectively flat, down 0.1% and gas cylinders down 3.8%. Slide 12 shows the trend in sales for Q3 2014 by geographic region. You can see that the largest variances are North America being up with improving U.S.

self-contained breathing apparatus sales and despite U.S. countermeasure sales being reduced. North America has benefited from the Luxfer Magtech acquisition in the current quarter. The UK is also up but it is only 11% of Group revenue.

The rest of Europe is down and impacted by the weaker economic activity in mainland industrial Europe, particularly general automotive, bus and industrial gas markets. Turning to the trading profit and adjusted EBITDA results on Slide 13. The Q3 2014 group trading profit was $10.6 million. That is $14 million for Q3 2013.

Elektron results at $8.9 million is weaker than last year in the prior quarter, impacted by lower of magnesium countermeasure sales and weaker sales and profits from zirconium chemicals. Adjusted EBITDA for Elektron was $11.9 million. So it was just behind the prior year of $12.1 million.

Gas cylinders trading profits for the third quarter of 2014 was $1.7 million, the same as Q2 2014. But a disappointing decrease from the $4.2 million trading profit for the third quarter 2013. Underlying revenue was down 4.6% and similar to Q2, the higher-margin composite revenue [pool] [ph] was greater.

This had a bigger impact on margin along with additional overheads focused on commercializing our new range of AF and medical oxygen products. Acquisitions in the quarter contributed $0.7 million to trading profit, being Luxfer Magtech less the start of losses at Luxfer Utah.

The group's margin fell through return on sales of 8.8% from 11.7% in Q3 2013, with both divisions having a weaker quarter. The year to date average being 9.3%. So we expected some improvement in the gas cylinders division from its weak start to 2014.

It is worth noting that in a normal year Q3 can be weaker than other quarters as a result of summer shutdowns with customers, particularly in Europe. Group adjusted EBITDA was $15.9 million compared to $18.3 million for Q3 last year. This means year-to-date EBITDA is down 14% to $49 million. That is $56.8 million for the year-to-date Q3 2013.

Primarily as a result of the weaker gas cylinders performance.

The acquisition accounting which is still subject to final audit in both splitting out from goodwill separate intangible assets such as IP, which have to be amortized through operating profits, as well as uplifting other tangible assets that are used to fair value which increased depreciation charges.

This means that though the full benefit of newly acquired profits do come through the EBITDA measure, only a reduced amount comes through trading profit and operating profits. We find adjusted EBITDA is therefore a better measure of post-acquisition performance and link to potential cash flow generation.

The Elektron's division adjusted EBITDA year-to-date is now $37.5 million for 2014, up on $36.9 million year-to-date for Q3 2013, helped by the benefits of the acquisition. To aid comparison and future modeling, in the appendices, Slide 27, there are reconciliations by quarter for each division between trading profits and adjusted EBITDA.

For guidance, the delta between trading profit and adjusted EBITDA for 2014 is expected to be between $20 million and $21 million. I expect for the full year 2015, this to rise to between $23 million and $24 million. The delta being depreciation of property, plant and equipment, intangibles and amortization of equity award charges.

Turning to the full income statement on Slide 14. The gross margins were also lower, though not significantly with Q3 2014 at 23.7% versus 24.2% for last year. The issues in 2014 have been more related to sales demand and not necessarily absolute margins. Gross profit at $28.6 million was only $0.4 million lower than Q3 2014.

Distribution costs of $2 million were higher, which is consistent with the other quarters in 2014. Administrative expenses were $15.9 million versus $13.4 million last year and require further explanation. $1.2 million of the increase is relating to acquisitions, including higher amortization cost of intangibles.

FX translation added $0.2 million in the quarter. Amortization, equity compensation charges added $0.5 million in the quarter. Under IFRS, the administrative expenses include sales marketing and development costs and therefore this line is also impacted by overhead invested in the longer term strategic product development projects.

Trading profit was $10.6 million for Q3 2014 as previously explained. We have implemented some headcount savings in both the gas cylinders division and the magnesium powders countermeasures business in response to weaker sales to create cost savings in both cost of sales and some administrative expenses.

In the quarter, we have booked $0.6 million of restructuring costs. The benefits of these cost savings should come through for Q4 2014. Operating profit which is after restructuring and other exceptional items was therefore $10 million, that is $13.7 million for Q3 2013.

There was also $1.5 million of acquisition costs incurred in the quarter relating to Luxfer Magtech. Under IRFS accounting, you do not capitalize M&A costs but instead they are written off as a one off charge.

Below this, I have broken out the elements of the IFRS finance charges, being net interest of $1.5 million on the actual financial debt for Q3 2014. Slightly up with higher borrowing and less cash in the quarter.

The notional IAS 19 retirement benefit finance charge of $0.6 million, $0.3 million lower than Q3 2013, as a result of a lower interest rate being used.

Plus a new line item relating to the notional interest cost of $0.2 million relating to the unwinding of the discounted deferred consideration on the Luxfer Utah and Luxfer Magtech acquisitions and is effectively part of the overall acquisition costs.

The effective tax rate was 27% versus 26% for the last year and this is at the guidance level I previously indicated. Net income for Q3 2014 was $4.5 million compared to $8.4 million for Q3 2013. But adjusted for exceptional items and excluding the IAS 19 finance cost, was $6.7 million compared to $9.3 million for Q3 2014.

And this is $0.25 per ADS, the full diluted equivalent is $0.24. The next Slide, number 15, shows the consolidated balance sheet. Overall, invested capital in the operating businesses was $298.9 million, net of the pension deficits of $85.5 million as of the 30th of September 2014.

The pension deficits have increased by $17.9 million from $67.6 million at the end of 2013. This is a result of the reduction in the discount rates used to value the long-term liabilities. This is based on AA corporate bond yields which have fallen materially in 2014. The U.K. rates fell from 4.5% to 3.9%.

The pension impact plus the translation impact of the stronger U.S. dollar on non-U.S. assets led to net assets or shareholders equity, also grew to a [full two] [ph] $179.3 million. We have analyzed out the separate acquisitions to show that impact on the balance sheet. Net debt, debt minus cash was $110.8 million.

The main increase, a result of the Luxfer Magtech acquisition being funded by a debt of $55 million. We issued in the quarter $25 million of new loan notes via the Prudential Insurance Company of America at 3.67% maturing 2021. And the balance is funded by the bank facility which matures 2019.

Earlier in the year we had also utilized the bank facility to help fund the increasing working capital, around $10 million of which relates to the virtual pipeline contract in Australia, details of which we had covered in prior calls. Turning to the cash flow on Slide 17.

Our operating cash flows in Q3 2014 were a positive $10.4 million, down on Q3 2013's positive $13.3 million but much improved from Q1 and Q2 2014. Under IFRS, this includes $1.3 million of acquisition cash costs relating to Luxfer Magtech.

We generated an inflow of $1.3 million from reducing working capital in Q3 2014 after large increases in Q1 and Q2. We expect this to be a further cash inflow to Q4. Working capital remains higher than planned due to excess inventory caused by the disruption in demand in various European and U.S.

markets plus the impact of the virtual pipeline contracts. With the next major payment due around the end of the year and the balance in 2014, actions to reduce working capital will continue well into 2015. Investment cash flows were a net spend of $62.4 million in the quarter.

We invested $9.7 million in Q3 2013, the initial net cash consideration of the Luxfer Magtech acquisition being $55.1 million. This excludes the acquisition costs. CapEx in property, plant and equipment was at $6.2 million which was the same as Q3 2013, and other investments were $1.1 million.

Cash flow before financing was therefore an outflow of $52 million, before the acquisition, though, this was a net inflow of $4.4 million in the quarter, higher than $3.6 million into Q3 2013. After paying dividends, net interest of $3.9 million, we have borrowed a net extra $59.9 million including the issue of the loan notes.

Luxfer employees invested $0.4 million via employee equity share funds and the total net cash inflow in the quarter was $4.3 million. Net cash at the end of the quarter was therefore $15.4 million. The next slide shows return on invested capital.

The lower profits in gas cylinder division and a higher working capital have impacted both the numerator and denominator in the calculation. Acquisitions also initially dilute the calculation. The ratio being low for the current businesses at 11% after-tax for the quarter.

Clearly organic growth, reducing working capital and seeing gas cylinders return to a better level of profits will all improve this ratio. In summary, the financial results for 2014 year-to-date are a disappointment on expectations.

But you can see Elektron division's adjusted EBITDA remains ahead of prior year, though helped by the profitable acquisition. Gas cylinders profits are down with challenges across its markets. We have implemented some targeted cost savings in response to this and plan more in 2015.

But as we have explained before, there is now a major focus on commercializing new products in both divisions which does come at an upfront financial cost and management time Cash flow generation, however, will be a major focus in the next few quarters. Thank you. I will now hand you back to Brian to sum up..

Thank you, Andy. Looking at Slide 20 there. In summary, our cylinder business continues to struggle and while the breathing apparatus market is returning to normal, it is not quite there yet. And in Q3, our alternative fuel revenues were well below target.

Specialty materials side of the business is doing well despite weakness in the military market and our new acquisition is performing as expected. European markets continue to show general weakness.

Administration costs are higher than prior year but a component of this is down the higher level of product development activity, particularly on Type 4 cylinders, but also in several other areas in generating and protecting intellectual property.

On Slide 21, looking at the balance of 2014, while the countermeasure flare customer that had the accident in February is back to normal capacity, the military market will remain depressed. The disruption in the SCBA market is lessening with every month passes but it will now be early 2015 before it can be expected to return to normal.

We will still be working on Type 4 cylinder designs during quarter 4, but we will start to recover the overheads of our Utah facility with sales of Type 4 product. Or other group on AF products indicates that we should expect higher sales in quarter 4.

The combination of these factors along with some overhead savings from actions earlier in the year is expected to deliver an improved cylinders result in quarter 4, although there is now no escaping the fact that it will be a very poor year for the division. Turning to Slide 22.

While we flagged that quarter three was unlikely to improve on our previous run rate, the actual quarter three result was disappointing. We do however expect quarter four to show improvements, particularly in cylinders, with improved SCBA and AF sales, our first meaningful Type 4 cylinder sales and cost savings.

In the Elektron we will have a full quarter's contribution from the new acquisition. Our program to improve working capital turnover is mainly focused on 2015 but should start to have an impact in quarter four. Finally, on Slide 23, looking at 2015.

While we are still preparing our budget for that year, we do feel confident that we can achieve a solid improvement in profitability. The important U.S. SCBA market is expected to be back to normal on a growth path. We will have a new range of Type 4 cylinders in the market for a full year, allowing us to address a new sector for us.

In Elektron, our military powder sales are likely to remain low against historical benchmarks but we do expect to make modest progress in a number of other sectors and we look forward to a full year's contribution from our new acquisition.

The outlook for the European side of the business remains unclear, compounded now by the weakness of the euro, which is affecting margins on exports into the Euro Zone when compared to even earlier 2014. We recognize that we have a lot to do to improve our working capital ratios, enhance return on capital.

We intend to focus on this aspect in 2015 and therefore expect the budget for strong cash generation. Although unlikely to have much financial impact in 2015, we do expect to make good progress on a number of our strategic projects and still hope to get to the point of commercial launch, especially on our IRS oxygen system. Thank you.

And we will now take questions..

(Operator Instructions) Our first question comes from the line of Martin Englert with Jeffries..

So looking at the SCBA market and the regulatory delays there.

How much of a drag on overall sales for 2014 do you think that was?.

Well, I think one of the issues is that it's quite a big drag against where we expected to be and where our customers expected to be. You may recall that we committed to put additional capacity in for these portable cylinders. And that’s been put in progressively in the second or third quarter this year.

So the sales will be down on 2013, when we expected them to be quite a bit above and we have facilitized to accommodate the increase in sales. But the third quarter in North America was only about $1 million down on the equivalent quarter of the prior year. Year-to-date remains further down.

And quarter four we would hope to start to be back towards the 2013 levels again. So it's big an important market for us. We will still probably remain a few million down, certainly North America over the course of the year. But quite a lot down on where our customers and we expected to be.

Of course, we hope that once the market is back to normal, that we will start to see that growth just deferred into 2015..

As best you can, can you try to quantify what the delta was on the -- how things are playing out for 2014 relative to what you expected? Are you able to quantify the dollar amount possibly?.

Well, the SCBA market is our single largest revenue sector. And in aggregate globally, between the composite side and to much more aluminum side, that was a $60 million business in 2013. And for 2014, while we have still obviously got a little way to go to see where it ends up, I expect that to be down on 2013.

Somewhere, less than $5 million down in the end. We started off in quarter one and two further down then that. I think we probably have recovered a little bit and quarter four will end up down over the year. Very rough and ready figures off the top of my head..

So if there hadn't been the regulatory delays, you would have expected something north of that $60 million in a more normalized market for 2014.

Is that fair?.

Yes. That’s fair. And the capacity that we put in place during the course of the year, we did make a statement about that when we approved it, which was done late in 2013. I think from memory that we quoted, that gave us an additional $10 million or so of sales capacity.

Now that wouldn’t obviously all would have fallen into 2013 because it was only coming in part way through the year. But that’s indicative of scale of growth that our customers and we were expecting and particularly the North American market..

Okay. That’s helpful. If I could, one more on the new Type 4 cylinders. What's your expectation there for the incremental sales on 2015 relative to this year.

I know there is still a lot of product development going on but do you have any initial expectations?.

Yes. I think, we are going to be less -- less sales in the balance of 2014 than we had originally hoped. Because we were a little longer getting the development done than we had hoped. So the sales in the fourth quarter this year will still be relatively modest. Something of the order of $1 million to $2 million.

Next year, I would expect the number to be north of $10 million. And if things go the way that we are planning, than that should be barely feasible..

[Operator Instructions] Our next question comes from the line of Julian Mitchell with Credit Suisse..

This is [John Cheper] [ph] for Julian. I just wanted to ask briefly about the rationalization measures and the degree of cost benefit you expect next year.

In a flat top line, could we still see decent improvement in profit?.

You mean year-on-year?.

Yes. Just for 2015, it says you are planning to recognize the benefits of rationalization measures, I have just taken this year. And I was just wondering, to what degree, even if the revenue level is relatively flat, we could still see profit go up..

Well, certainly the cost reductions that we have taken, quite a few of them started, would impact this year. So we have said previously that fourth quarter will benefit from some of the actions that we took, round about the middle of the year. And so specifically in relation to the cylinder business, we took actions that are in the middle of the year.

We could take out about $2 million a year on an annualized basis. So implicitly, we are expecting half a million saving in the fourth quarter of the back of those and the full $2 million next year. So that’s specific set of actions will have a incremental, approaching more than half million. A little bit less because we have got some benefit in Q3.

And the actions we will take -- plan for Q1 next year, might add another million to that. So it's that sort of order of magnitude. We have also taken some action in the Elektron side of the business, particularly on the powder side. That’s a small order of magnitude.

And the level of added volume of that product is quite high, so we want to retain our capability to respond to whatever demand appears. So that’s a smaller order of magnitude, of the order of a few hundred thousand dollars.

So they are not insignificant in the context [from] [ph] saving on overhead, but we are not in a situation where we were looking at taking out plans. That is always kept under review, particularly where markets are not performing the way that they are expected to. But at the moment we don’t believe that that is justified.

So what we are talking about is shaving of overheads rather than dramatic rationalization in the nature of plant closures..

That’s very helpful. And then just a quick on gas cylinders expectations for Q4. Just to clarify, it said in Slide 21 that you are expecting improved sales in Q4. I am assuming that means year-over-year rather than sequentially.

Is that accurate?.

Well, it's probably both. More to do with Q3 than prior year. Because we still expect a little bit of improvement in Q4 on SCBA. We have seen -- most months we have seen the best sales so far this year. So that’s still coming through in the fourth quarter we hope. And we do still hope that this MSA product will get approved.

It seems to have been a week away from being approved, for some weeks now. So the SCBA market should be, we hope, our best quarter this year. Our alternative fuel order book for the fourth quarter would indicate that we can beat the Q3 revenues which were really quite depressed by several million dollars.

And so it's more of an uplift against Q3 in reference to prior year..

It appears that we have no further questions at this time. I would like to turn the floor back over to management for any additional or closing remarks..

Well, I will just give it a few seconds to see if anyone else comes onto the queue..

And we do have a question from the line of [Carl Gardner with Shafer Cohen] [ph]..

I had a question with regard to the military powders and the continued weakness you expect throughout this year. And it looks in 2015, I would think that with the one customer having been out of production for a while that there will be some demand that would come back from them.

So just explain to me kind of that continued weakness, I guess it relates to the final end markets?.

Yes. It's really driven by the fact that the DoD are in a de-stocking period. Getting their level of stocks down from a war level to a peacetime footing. And our modeling, which has to be very rough and ready and does vary a lot flare by flare, would indicate that that process is unlikely to be complete until some point in 2016.

So the underlying demand from the military is going to be depressed much through 2015. Between us and the military, you obviously have our two major manufacturers of flares. And they obviously have an influence on the demand that we get as well.

So I think it is quite feasible that we will see some improvement in our sales next year because of an absence of the disruption in the market at the customer level that we have seen in 2014. Without it necessarily having much impact on the DoD demand. But basically that actually [indiscernible] in 2014.

It's extremely unlikely that DoD will ask a company to recover the lost supplies. They will just take advantage of the shortage of supply to get their stocks done a little bit quicker than they would otherwise have done. And so the best say to that really is that they get to their end objective a little sooner than they would otherwise have done.

But that’s probably still unlikely to be in 2015..

And just as a follow-up. I mean obviously as this year has progressed kind of the advent of peacetime, looks tenuous and there has been an increase in military activity including the use of aircraft, for example in the Middle East.

In past experience when you have seen geopolitical evens like that, military events like that, how long does that actually flow through a change in the DoDs disposition?.

It is definitely helpful. And particularly helpful when the missions are being flown off carriers because that tends to be a one way trip with flares being dumped before the plane run back on the carrier. So to the extent that you have seen activity in the Mediterranean, that’s definitely helpful.

Having said that, in peace time, there is still a lot of usage of these flares. So the peacetime level of usage on routine missions and practice missions is probably still half the level that the wartime usage would have been. So it's not as all this activity that you are seeing in the [med] [ph] is completely incremental. But it's certainly helpful.

And in regards to the flares used by these navy planes, I think that if it carries on or even increases, than that might help the situation at some point, next year. But it's too difficult to predict at the moment..

Our next question comes from the line of Eric Beyrich with Arbiter Partners..

I was hoping you could talk about some of your other development projects that you have mentioned in the past that didn’t get any airplay this time. In particular, your bioabsorbable magnesium [stent] [ph] and your industrial and automotive emissions catalyst..

Well on the stent, that is going to plan, as far as we can tell. The stent is actually in body and it think it's about 100-120 people at various places in Europe. So we are in sort of stage 2 clinical trials. All of our [trials] [ph] are conducted our bio-technology partner, not by us.

But we get occasional reports from them and that seems to be going pretty well. The design of the alloy that we are providing is frozen so as to allow that test to proceed. And to the best of our knowledge, our customer still hopes to get CE approval for the stent in order to be able to sell it in Europe, round about the end of 2016.

So it's still not a revenue generator in any great sense until 2017 although the supply of prototype material out of the special facility that we built here in Manchester is sufficiently high that even today it covers the cost of that facility, which we built to -- dedicated to these bioabsorbable alloys.

So that one remains on track, to the best of my knowledge. But still two year away really, from starting to generate what we hope will be very exciting revenues. In relation to the industrial catalysis side, which I think is one that you are asking about. That market continues to be promising for us.

The development is slow and the contracts that we get for industrial catalysis product still are quite what I call lumpy. And so in the first quarter of this year, we got some very large orders for the industrial catalyst.

And what tends to happen with these is that you will sell quite larger order and then that order will come back as much as two years later for a replenishment charge and our objective is to expand our presence in that market so that we get more and more contracts and eventually we see the sales smoothing and increasing.

So we do expect that we will show an increase in industrial catalysis sales -- a trend to increase industrial catalysis sales. The breakthrough that we are looking for really is to win a large-scale contract for probably our underlying petrochemical plant.

And we have been in discussions for some time with customers who believe they have that application. That's something that we remain in discussions on. It's not yet visible but we do believe that it's out there. But from where we are today, even if we got the order, it's unlikely to be resulting in sales in 2015. It's more likely to be a 2016 matter.

So I think the 2015, we do expect to see further growth in industrial catalysis but the big breakthrough is still a little way away..

And what about the auto catalyst business?.

Well, auto catalyst is really a development project in the sense that that's one of our [cooler] [ph] markets. At the moment that is fairly flat year on year. We had hoped by now to be getting improved sales out of the European market, but as I referred to in the commentary, that's really not happened.

We do, I think, have a stable situation and it will be our objective to improve our market share in that sector progressively over the next couple of years.

Because, and we have admitted this previously, that we do believe that we have lost market share over the past three years with the impacts of the rare earth pricing and the competitive advantage that it gave to a couple of people out there that didn't incur those costs or then pass them through.

So we do have a task in hand to improve our market share in that sector. But that’s a long-term project. Because you tend to win market share in that sector by getting specified on new vehicle platforms. So the vehicle platforms that we are tendering for now, really wouldn't go into production until it was like end of next year..

What about the diesel catalyst?.

Diesel is very slow. That’s again a long-term project. The timing of the product that we put onto the market I think with hindsight was unfortunate because the product contained cerium, a rare earth.

And while technically it performed very well, the client base got scared off by the price volatility of the underlying cerium and therefore the diesel products that we were offering.

So while we remain of the view that technically it's an excellent product, we missed the first boat really with the change in the Euro 6 regulations to get it specified as the preferred material. So it's is still out there. We are still endeavoring to attract the market to it.

But it's going to be a long drawn out affair to win the business over to as progressively..

Our next question comes from the line of Philip Gibbs with KeyBanc Capital Markets..

I've had a question on just the third quarter. It seems like it was below your internal expectations, if I'm reading you correctly.

What was maybe a little bit different than what you may have been anticipating a few months ago?.

Yes, the cylinder business was -- and we did expect a bit more rapid improvement in the SCBA side. We did expect to have a bit more contract business in alternative fuel. And what business we are looking at got delayed, so we were [short of] [ph] revenue in these two sectors.

And then Elektron, the sales of [indiscernible] of the zirconium plant here in the U.K. were a bit weaker than we expected. European auto demand wasn't strong and we had really no sales of industrial catalysis. So a little bit is contributing from each of those. I mean we did flag that Q3 wasn't likely to be an improvement against the run rate.

We didn't expect to be down on the run rate, which is where it ended up, which is why we say we were a bit disappointed. Now some elements of that we hope to see instead in Q4 with the SCBA, the alternative fuel etcetera.

And that's why we have said that we do believe that quarter four will be our best quarter this year, which is still not where he want to be but at least, hopefully, a sign of an improving trend..

Okay. And then you made some comments about wanting to focus on cash flow generation and taking down some net working capital. Anyway you could frame up how much excess inventory you have right now? Since that's the way that I was thinking about it..

Yes, Hi, Phil, it's Andy. So we're looking over, say the next, not just the fourth quarter but in terms of the first half at least of 2015, and seeing this as an exercise over the next 9 to 10 months.

The [temp] is around $10 million which is locked up in the Australian gas transportation project, which should all come back by suddenly the third quarter of next year and quite a big chunk back by the half year of next year.

And on top of that, it's at least 10 million of inventory that now we would be aiming to get out of the system over this next period. Obviously, it's always subject to a little bit of supply and demand. If demand is there, it changes the dynamics.

But you're looking at a good $20 million there that could be a net generation, say by the middle of Q3 next year..

Okay. Perfect. And then my last question was on the SG&A or the overhead. I think it was around $17 million in the third quarter.

Is that a good level relative to sales that we should we assuming moving forward or was that quarter a little heavy?.

That quarter was a little heavy and we're certainly trying to, targeting to take a little bit of cost out of that over the next two or three quarters. So it was a little bit heavy. It is being slightly distorted by FX as well, with the changes in the dollar exchange rate, as all the numbers are. But it was a little bit heavy..

Our next question comes from the line of [Gara Norian with Calasay Capital Management] [ph]..

Just wanted to make sure I understood the seasonality from the acquisition, I mean $6.5 million that you guys got in the quarter.

What's the right way of thinking about how that might trend over the course of four quarters of a year?.

Well, we have given guidance that the acquisitions should improve the Elektron division by around 10% in terms of its revenue. So the actual, those couple of months were actually above trend. We kind of expect that to continue every quarter. It was just a very good start. So it's above the expectation.

But over a full year, I mean Elektron does near $250 million to $300 million and we are looking at it being a 10% contribution to that..

I think we would prefer this point to state with our previous guidance which is that the acquisition should bring about [$30 million] of turnover into the business. So that would be our average run rate in that 6.5, which is a little bit boosted by some supplementary orders from the military side for these flameless [indiscernible] heaters.

So I think at this moment, just two months through the door and still getting our arms around what were understandably a more primitive accounting systems. We prefer to just stick with our original guidance of $30 million turnover..

All right. Thank you..

Okay. We are getting close to market open.

So time for one more, is there one?.

We have no further questions at this time..

Okay. Well, thank you very much ladies and gentlemen and we will speak to you in the new year when we have the fourth quarter available for you..

An encore recording of this conference call will be available in about two hours. Telephone numbers to access the recording will be available on the Luxfer Group Web site at www.luxfer.com. Thank you..