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

Lee Sandquist - Credit Suisse Phil Gibbs - KeyBanc Capital Markets Garo Norain - Palisade Capital Management.

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

After that, Brian and Andy will be glad to take your questions. To make sure that as many questioners as possible get a chance to participate, we request that you initially ask only one question. After you have heard the answer, we will give you the opportunity to ask a follow-up question.

If you would like to ask additional questions, our operators will be glad to place you back in line. We now turn the call over to Brian Purves..

Thank you. Well, good morning, everyone. And welcome to the Luxfer Conference Call on the Third Quarter of 2015. I will start on Slide 4, on quarter three.

While we achieved several of the targets that we had set for quarter three, our operating profitability did not improved quite as hoped remaining flat over prior year after the impact of adverse exchange rates.

We continue to make progress in the area of alternative fuels winning new business in North America and winding down the loss-making German operation. The important North American SCBA sector remains well up on prior year and the Luxfer Magtech acquisition continues to perform well with $7.6 million of sales in the quarter.

The areas that held us back were firstly, auto-catalysts products where demand was particularly weak and secondly, aerospace alloys, where it appears there is an addition to military production being down, civilian helicopter build rates have also fallen with lack of demand from offshore oil and gas customers being cited.

Adjusted fully diluted EPS of $0.28 was slightly below consensus, but $0.04 ahead of quarter three last year. And quarter three was again good on cash flow. Turning to Slide 5, the North American market self-contained breathing air kits is well up over 20% on prior year with the main manufacturers having their new kits approved.

Although the euro has recovered a few cents from its low point, the continued weakness of the currency is hurting margins on sales out of our UK businesses, as hedges taken more than a year ago mature, and the newer hedges at plural rates come into play.

After several years of consistent growth, we have seen the sales of our high-performance magnesium alloys lower this year, with there is a lower build rates on both military and civilian helicopters. Our objective of course is to expand the market for this family of alloys and build rates of civil airliners still look very healthy.

More encouragingly, we received our first substantive order for the new SoluMag alloy aimed at dissolving down hole tools for the oil and gas industry. Slide 6, our program to rationalize our alternative fuel manufacturing facilities is nearing completion.

The Utah facility is inactive and type 4 cylinder production has been located at a riverside plant. Luxfer Canada has now acquired the bulk of the approvals necessary to takeover production of European cylinders from Germany at the end of the year.

We will have to reassess the remaining stock in Germany as we approach alternate closure and there is the risk that we need to take upon their impairment charge as sales are being quite weak. We still expect to see the cash cost of the rationalization, mainly for severance payments to be very close to the forecast we gave earlier this year.

Although we continue to incur losses on alternative fuel, it is encouraging to see the North American part of the business move back into profitability by virtue of both cost reduction and winning new business.

Slide 7, SUB161, the start-up virtual pipeline customer in Australia that got into difficulties last year as a result of the engineering problems with their infrastructure. That business was successfully recapitalized during quarter three. Luxfer is now a shareholder in the business and we have appointed and elected to the Board.

Our trade receivable is now secured against the assets of the business.

Since the end of quarter three, the business has received reimbursement of a substantial quantity of research and development expenditures which was the last piece of the restructuring required to give the business the stability to prove the consent of the virtual pipeline incorporating our gas transportation modules to the Western Australia mining operators, where SUB161 is the first mover.

Turning to the revenue slides on the Elektron first, stripping out last year’s remaining surcharge and also exchange rate movements, on the Luxfer Magtech acquisition, underlying sales are down in the quarter by 9% on prior year.

Aerospace alloy sales are down from 14% this year, but the main issue in the quarter was a further drop in sales of automotive-catalysts material.

While some of this can be attributed to the market, the slowdown in China and the problems of Volkswagen Group here in the Europe, we have also become convinced that we have lost market share, not necessarily to pay our competition and this has resulted in the legal action which we mentioned later.

Sales of military powders remain well up year-on-year. Turning to cylinders, after adjusting for exchange rate movements, the cylinder business has revenues up 2.7% on prior year with North American SCBA well up and even alternative fuel sales up on last year, now that the sales to SUB161 in the first half of 2014 have fallen out of the comparison.

The European business is building adversely affected by the weak euro, but our Canadian operation is gaining from the weak Canadian dollar.

Alternative fuel sales in the quarter totaled $7 million, well up on the low point of $4.7 million last year and up on the $5 million seen in the first quarter of 2015 with the improvement all coming in North America. Aluminum cylinders were down and Superform had lower tooling sales than this time last year completed in the picture.

On slide 10, the update on our strategic growth projects.

Interest from manufacturers of aircraft seating and our alloys remains high and apart from marketing, most of our effort is now directed towards expanding our capabilities to provide the alloy in whichever form the industry needs to make switching materials mainly from aluminum both easy and cost-effective.

The feedback on clinical trials given by our partner at a recent technical conference is very encouraging about the Synermag bio-absorbable alloy and leads us to expect that the cardiovascular application can be in the market sometime next year, a little earlier than previously expected.

Our innovative medical oxygen delivery system is our important real category of home oxygen therapy patients entered the testing phase to support CE approval for the product. Standards have to be extremely high for such a device.

And there is our own four months slippage from our previous timetable, but we still anticipate device being on sale in the second half of next year. On diesel catalysts, our efforts to break into this market in 2012, 2013, were largely unsuccessful, at least in part we believed because our products contain rare earth.

On the rare earth pricing prices were still at that time a major concern for the industry. Rare earth prices have now stabilized at quite low levels. On recent publicity, Mike indicated that the technology being used by the automotive industry is not in fact coping very well with the latest emissions legislation.

Accordingly, we have tested all of our product information and will try to ensure that the industry is at least reminded of our alternative offering.

Alternative fuel, while that market generally remains quite depressed, there is a bright spot in the growing use of hydrogen under GTM joint venture is making good progress selling hydrogen transports and hydrogen fuel cell ports.

There are also more stable parts of the market such as crash trucks and other local authority vehicles where we feel that we are winning market share and this is before we launch our Gen 2 type 4 cylinders which we expect to be class-leading in both weight and capacity and which we plan to launch in the coming weeks.

On Slide 11, we published a press release some weeks ago, we are now convinced that some of the decline that we have experienced in the catalysts market is a direct result of losing sales to Chinese manufactured products made using a process that infringes on our G4 platform.

This is something that we have been working on for well over a year establishing our fingerprinting technique to detect whether our patented process has been infringed. Our UK pension scheme, there are UK regulatory changes coming along next April in the UK that would make defined benefit pension plans even less economic than they are today.

Accordingly, we want to close the plan to future accruals by next March. Our UK plan also uses the retail price index to inflate pensions and payments. But this index is now discredited and CPI the preferred measure.

These proposed changes have been agreed in principle with the trustees of the plan, but the company is obliged to undertake a 60 day consultation with the plan members and this is three quarters of the way through.

If approved, following the consultation, the proposed changes will have a material beneficial impact on the calculation of the actuarial deficit making the pension plan more secure. On share buybacks, while we bought nearly $2 million worth of shares in quarter two, we made no further purchases in quarter three.

The current program is to satisfy the needs of our management and employee programs and it has reduced with latest view on the outlook for 2015. We do intend to be back in the market in quarter four, given the current very low share price and now that we are out of our reporting blackout period.

Andy Beaden will take you through some of the details on the Q3 results. .

Thank you, Brian and welcome everyone to the call. Brian covered the divisional sales analysis and my first slide is Slide 13 and it shows how that consolidates into the Group revenue changes for Q3 2015.

Total revenue for Q3 2015 was $113.3 million with no separate rare earth chemical surcharge now required after and this compares to $120.5 million of net revenue in Q3 2014. From the slide you can see FX translation differences reduced net revenue in the quarter by $4.8 million. The accretive benefits of Luxfer Magtech was $1.1 million.

Other underlying revenue was down $3.6 million or 3.1%. And as Brian’s slide showed, this was a result of the lower Elektron revenue with gas cylinders’ underlying revenue improved on Q3 2014. Slide 14 shows the trend in sales for Q3 2015 by geographic region.

The percentage improvements in North American sales to 55% from 51% represents that region holding up better with stronger self contained breathing apparatus sales improving AF and the addition of Luxfer Magtech, offsetting any negativity in the aerospace and the Zirconium markets. The main falls in sales are in Asia and Europe.

Now European Zirconium business has particularly suffered in the quarter. AF was also weaker outside North America. Turning to the trading profits and adjusted EBITDA results on Slide 15, the Q3 2015 Group trading profits was $10.6 million, the same as Q3 2014. At constant exchange rates, trading profits was up $0.3 million or 3%.

Elektron results of $7.5 million was down on $1.4 million on Q3 last year. The negative FX impact was $0.8 million and the underlying profits was therefore down $0.6 million. The negative impact from the full in Zirconium catalysts sales had a much larger impact on this.

If Luxfer Magtech improvements in magnesium photo engraving plates and powder sales helping offset that impact. The division also achieved fixed cost savings of approximately $1 million. Adjusted EBITDA for Elektron was $10.5 million compared to Q3 2014 with $11.9 million.

The EBITDA margin for the Elektron division was 20% which was fairly similar to last year which was 20.2%. Gas cylinders trading profit for Q3 2015 was much improved at $3.1 million, up $1.4 million on Q3 2014. The constant exchange rates, the division was up $0.9 million.

Remarkably, we had a better quarter on FX benefiting from being well hedged in the UK and gaining from the focus of AF production in Canada which has a favorable exchange rate when importing back into the US. The division also achieved $1 million in fixed cost savings. The AF operations still lost $1 million in the quarter.

Though this was net of a now profitable Canadian AF operation, with losses in Germany still having a drag on results until the closure of its manufacturing facilities at the end of 2015. Weakness in some traditional aluminum markets also had a negative impact on profits, particularly in Europe.

Gas cylinders adjusted EBITDA was $5 million, up $1 million on Q3 2014. For Q3 2015, Group adjusted EBITDA was therefore $15.5 million compared to $15.9 million for Q3 2014. The FX impacts on adjusted EBITDA was a negative $0.5 million. So at constant exchange rates, adjusted EBITDA was up slightly by $0.1 million on Q3 2014.

The Group’s adjusted EBITDA margin was 13.7%, compared to 13.2% for Q3 2014. For the year-to-date Q3 2015, adjusted EBITDA is now $47.6 million against the $49 million for Q3 2014, but at constant exchange rates, the adjusted EBITDA is up $2 million or 4.1% with the FX differences reducing the results by $3.4 million on a cumulative basis.

Turning to the full income statements on Slide 16, we have covered the revenue and trading profits, so I will not repeat my analysis on those items, but the gross profit margin was 22.5% versus 23.7% for Q3 2014. The pull in the margin percentage was a result of the weaker sales in Elektron with a negative mix effect.

So, at a Group level, a higher proportion of sales were from the lower margin product lines.

Distribution costs at $2.1 million for Q3 2015 up slightly ahead of last year with admin expenses are much lower in the quarter, down to $12.6 million from $15.9 million with several million dollars of cost savings in the quarter and also some benefit from translation differences.

In the quarter, we have charged $0.3 million to restructuring and similar expenses and this relates to the restructuring of the gas cylinders division and AF businesses. Operating profits, which is after restructuring and other exceptional items was therefore $10.3 million for Q3, 2015 versus $10 million for Q3 2014.

For operating profit in Q3 2015, we had $0.1 million in acquisition costs in relation to SUB161 investments. In Q3 2014, we had the Luxfer Magtech acquisition costs which were $1.5 million. I’ve broken out the elements of the IFRS finance charges being as follows, net interest $1.5 million which is the same as last year.

The notional IAS 19 retirement benefit finance charge is $0.8 million which is a $0.2 million higher than last year’s quarter and that’s due to starting with a higher pension deficit in the quarter, the $0.1 million of that is effectively rounding through the year.

First it was $0.1 million for the notional interest charge on the deferred acquisition consideration which is a $0.1 million lower than last year.

In the appendices of the presentation is worth noting that we disclose our non-GAAP reconciliations for adjusted EBITDA, adjusted net income and adjusted EPS and you can see that we strip out of our figures the restructuring costs, acquisition and disposal items of IAS 19 finance charges.

The headline effective tax rate was 22%, the same as the underlying rate for adjusted net income. In Q3 last year, the effective rate was 27%.

The improvement was a result of being able to take advantages of tax losses in Canada following its improved profitability that we still suffer from losses in Germany, which results in no additional accounting tax credits due to its ongoing loss position. Statutory net income for Q3 2015 was $6.1 million, compared to $4.5 million for Q3 2014.

For adjusted for exceptional items and excluding IAS 19 finance charge, Q3 was an underlying net income of $7.6 million, up to $0.9 million on Q3 2014. Fully diluted adjusted EPS was therefore $0.28 for Q3 2015, compared to $0.24 for Q3 2014, so up 17%. This is slightly below what we had expected.

As a result of the weaker Elektron results, though this was offset partly by the improved tax position. The next Slide, number 17 shows the consolidated balance sheet. It reconciles the key changes from December 2014 to September 2015.

Overall invested capital in the operating businesses was $259.5 million net of the pension deficits of $88.6 million as of 30th of September, 2015. Though the deficit is still slightly favorable to 2014 year end position, in the quarter, the deficit increased as a result of flows in equity investments.

Net debt which is debt minus cash was $97.6 million, down from the $106.8 million at year end 2014. Thanks to the stronger cash flow. FX differences, primarily due to the stronger U.S. dollar, reduced net assets by $5.2 million and the year-to-date rationalization activity reduced assets further by $9.8 million net of tax.

Turning to cash flow and that’s Slide 18. So another good cash quarter. Our operating cash flows in Q3 2015 were a positive $13.3 million, compared to Q3 2014’s positive $10.4 million. Working capital was an inflow in Q3 2015 of $1.4 million, with reduced receivables and inventories.

Actions continue though to reduce working capital further with potential for further inventory reductions in the balance sheet. It’s worth noting that we have now generated $53.6 million of operating cash after tax in the last four quarter since the end of Q3 2014. Investment cash flows in Q3 2015 were a net spend of $4.1 million.

We invested $6.5 million in Q3 2014. CapEx in property funds and equipment at $3.6 million was lower as we managed cash flow and we capitalized $0.5 million of intangibles. We made a SUB161 investment, which is $3.7 million and received $0.1 million of interest from our JVs.

Cash flow before financing was therefore an inflow in the quarter of $5.6 million, compared to an outflow in Q3 2014 of $15 million. The outflow last year being result of the Luxfer Magtech acquisition. Total cash balances fell from Q2 to Q3, back to $39.6 million as we used $19.1 million of the spare cash to repay the revolver.

We received $0.1 million from employee share funds buying new shares and spent $0.2 million on settlements relating to our share buyback program. So in summary, we made progress on the profitability of gas cylinders with fell back in Elektron, mainly due to the weaker auto-catalysts sales.

Trading profits and adjusted EBITDA at constant FX rates were both slightly up, EPS more so with a benefit to the lower tax rate.

The restructuring of our AF operations continues and we might see some non-cash write-offs of assets in Q4 as we muck up the manufacturing closures of Germany and Utah and will review the estimates or the estimated write-off of assets booked earlier in the year.

On the cash side, we had another decent quarter and remain on track for a much improved year in terms of trading cash flow. Thank you and I’ll now hand you back to Brian to sum up..

Thank you, Andy. On Slide 20, then summarizing quarter three, the profitability of our cylinder business is improving with North American SCBA back on growth and progress being made on improving sales and cutting costs in the alternative fuel business stream.

Unfortunately, it is the turn of the Elektron division to have a couple offset that’s below par with the aerospace alloys down for the first time in several years and our auto-cat sales also down.

Having researched the decline that we have experienced in auto-cat over the past three years, we believe that much of it is a direct result of losing sales to products made by a process that infringes our G4 patent and we have now commenced legal action.

The highly publicized problems of Volkswagen Group seem also to be creating short-term disruption to supplies. Although our adjusted quarter three EPS was just below consensus, it was $0.04 better than in 2014 and our cash performance remains very strong. Turning to the outlook for the divisions.

Weak sales of aerospace alloys and auto-cat products seem likely to continue through Q4 with the current disruption in the European market with Volkswagen Group another unhelpful factor. Elektron will have a very good boost from its first sales of the new SoluMag material for the oil and gas industry.

There is magnesium Elektron video showing the material on YouTube for those interested. The weakness of the euro is hurting the profitability of our European operations and we can see little change in that outlook. The North American sale of the cylinder business has strengthened and we believe that will continue.

Alternative fuel losses will not be eliminated until the end of the year, but we expect the alternative fuel business to be profitable thereafter. And order cover for European medical cylinders is higher for quarter four for some time. Turning to Slide 22.

We cannot see the market background changing much in quarter four and so, reluctantly must accept that the 2015 operating results will remain down on 2014 as reported with adverse exchange rates, key reason for the net reduction.

Despite the continuing low oil price, our imminent launch of our Gen 2 CNG cylinders should help to consolidate the gains made at our alternative fuel business and with the cost reduction actions in hand, we believe that this business stream will be profitable as we enter 2016.

The weakness of the euro has material – has had a material adverse impact over the last two years, and there is little sign of its strengthening. It is worth noting however that the fall in commodity prices is starting to help, especially in those areas where we do not or cannot hedge our exposure.

Quarter four we will see the first of our sales for the SoluMag alloy for the oil and gas industry and we have high hopes for this product over the next several years. We have taken the serious step of launching an IP action against a competitor and that is with a specific intention of improving our position in the catalysts market.

Although, it is unlikely to have an impact in the remaining months of 2015. The aggregate of the above factors is expected to be a healthy positive. With the actions that we are taking on the new products that we are launching are continuing negative market conditions in certain areas.

Our cash flow performance is much improved and we intend that that should continue remaining confident of our ability to further improve our return on capital. Thank you and we will now take questions. .

Our first question comes from the line of Julian Mitchell of Credit Suisse..

Hi this is Lee Sandquist on for Julian Mitchell.

Can you please give us some color on the timing of the restructuring benefits? And secondly, can you please remind us what your capital allocation priorities are moving into 2016?.

Well, the benefit from alternative fuel should really be felt as soon as the German operation closes which is kind of the schedule to be right at the end of 2015. So, we have been getting benefits through the course of the year in North America, but as the German plant has been wound down, the level of sales in the European market has reduced.

So the German losses if you like have worsened which has offset the improving profitability of the North American alternative fuel business. But over the course of the year, we expect to lose roughly the amount of money that we said previously and we expect the business to be profitable in 2016.

So, this should be a delta there of around $4 million with 2016 being best than 2015 with the benefit being seen more or less right away at the start of 2016. In terms of capital allocation, we obviously put a budget together which we will be presenting to the Board in the coming weeks.

We will be constraining capital expenditure to preserve cash to the extent reasonable, but we adopt a process whereby the businesses have to basically bid for capital expenditures on the anticipated IRR that they can generate.

And so, the capital expenditure for 2016 will be heavily focused towards those business units and those projects which will generate the best medium-term payback. .

Great, thank you..

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

Hey, morning. .

Hi, Phil. .

Hey, Phil..

I had a question on the Zirconium market and specifically the auto-catalysts business and the diesel and the CamCad, I just kind of want to take a piece-by-piece here kind of weave that into some of the comments that you made about Volkswagen and market share losses there, I know the market share losses appear to be going on for a while, but just maybe queue us in on maybe not the patent infringement, but what’s new really in the business and how you are looking at the whole mosaic here for the Zirconium side?.

Okay, first of all, what I’ve been talking about catalysts on the course of the call is really the automotive side. The industrial catalysts side continues to grow very slowly, not as fast as we’d like, but it is growing and we still expect it to grow further into the future. So, nothing much has changed on that side.

It still comes through in lumps of business, it’s not a stable month-on-month revenue stream, but the trend is still we believe positive and we still think that there is the possibility of they are much bigger contracts as we go forward. Turning to the auto-cat side, we have been losing sales in auto-cat for sometime as you say.

On the root there I think goes back to the rare earth pricing crisis in 2011. 2012 when the prices that we have to push into the market to recover the dramatic increases in rare earth costs were major shock to the market.

And unfortunately, we were – we had to do that as a survival matter but, Chinese manufacturers or the Chinese base manufacturers had access to domestic pricing for rare earth which is much, much lower than the export prices that we were having to pay.

Secondly, our Japanese competitor Daiichi Kigenso which is a listed Japanese company, they chose not to pass on those rare earth prices and surcharges and they lost $100 million over a two year period.

Those are published figures you can go and check them, but they got build out by the Japanese government which has decided to protect Japanese industry from the rare earth issues.

So, at that time, we started to lose market share, because basically, with us passing on the full cost of the rare earths, our pricing was hugely higher than those two competitors. Of course, actually measuring the market share losses that you incurred is not easy, because there are no published statistics out there.

But we recon that we were losing market share and we recon that that has continued. We put a lot of effort into establishing what the scale of the market is and to track shipments from competitors.

And so, we’ve come to a conclusion that we have lost market share and one of the parties that we’ve lost market share too is this Chinese-based manufacturer and we believe that the products that they are selling is – can only be made using our patented process. So, we intend to get aggressive on that front and try and stop at.

The other actions that we can take to recover the market share are obviously, getting more aggressive on pricing in some instances, but more importantly, concentrating on the next technology step on making sure that we are first to the market with the next improvement in that area and that’s what we are working very hard to achieve.

So, we definitely lost share. I don’t know, how quickly we can recover it through the IP side that’s we’d simply had to take action on it, but how quickly it benefits us I can’t honestly guess at the moment. But, our objective is obviously to reverse that decline and start to recover it over the next two to three year period. .

Okay, Brian and then, is the automotive-catalysts business, your legacy business, is that inclusive of the diesel business? Is that predominantly the end-market, I know you were reading some comments from Volkswagen and there, so, I am just trying to understand how much of this is light vehicle, non-diesel versus maybe some diesel markets which I know that you had outlined as a growth opportunity?.

Well, we don’t – as I said, we don’t have that much presence in the diesel market today. The vast majority of our catalytic materials go into three way catalysts or for gasoline engined vehicles.

So the diesel side is – was an opportunity for us, maybe could be an opportunity again with the problems of being publicized about the Volkswagen’s difficulty in achieving the emission standards. So that – if anything that’s an opportunity but it’s very difficult to quantify at this time.

However, the fact that Volkswagen has taken a hit on sales, and I think it’s fair to say that subjectively the view seems to be Volkswagen sales have taken a hit whether on diesel or petrol and there has been some suggestion that some of their petrol engines are similarly affected.

That does seem to have introduced a degree of disruption into the European supply chain and of course some of the manufacturers that we supply in Europe are quite heavily dependent on Volkswagen Group, which is by far in a way the biggest manufacturer in Europe at various times, it’s been the biggest in the world, because we are not just talking about Volkswagen, the brand, we are talking about Volkswagen, Audi, Seat, Skoda.

Volkswagen Group is by far in a way the biggest player in Europe.

It does seem to be that the supply chain in Europe has been disrupted by what Volkswagen is suffering, I hope that’s a relatively short-term answer, because people will get over the propensity or indeed they will move to other manufacturers and start buying petrol engine cars from them.

But, right at this short period of time, our customers are cutting back on demand and we know that some of them are quite heavily dependent on the Volkswagen Group. .

Okay, that’s very helpful. Just a couple of follow-ups.

On the CapEx, I think you said, $18 million this year, does that include the investment that you made in the Australian energy venture?.

No, Phil that’s separate..

Okay. And then, can you remind us on what if things stated – you call it a 106 to the euro and then also the current relationship to the UK sterling, what the impact from the hedges would be next year in terms of the headwinds that you would see? Sorry if I missed it..

Well, we’ve quantified it before, but certainly, if the exchange rate stays where it is, and we are not fully hedged for next year. So it is substantial spot exposure. But, year-on-year, we’d have to recon on $2 million to $3 million adverse being the impact – additional impact of the euro 2016 over 2015.

On the cumulative impact over the past 2.5 years, it’s probably going towards $10 million..

When you bring that seven Brian, of course, we’ve discussed this before, there are other favorable movements would not have the full ventral or even significant benefits yet to lower quantity cuts because of low hedging and inventories in the system.

So, I think we discussed that that the euro is a negative commodity cost or input costs would be at similar positive. .

Yes, similar – similar – similar, positive. .

Okay, so the commodity cost deflation on steel and aluminum et cetera could offset those FX headwinds next year?.

Yes..

That’s helpful and where would you be seeing those commodity costs benefits? Is that mostly in the cylinders side, because you buy a lot of steel and aluminum?.

We buy a lot of aluminum in the cylinders business. So that would be a benefit both from the falling LME price, but also from the delivery premium which has dropped quite significantly in the last six months. The Midwest delivery premium has dropped from over $500 down to - I think below $200.

So that’s quite material on the LME price, it obviously dropped as well, but we do hedge the LMEs, so, that’s more a gradual benefit where the premium is more immediate. Not of course is a global benefit, whereas the euro exchange rate is an adverse of the European business. The commodity price benefit is global.

But we have also seen the price of Chinese magnesium fall and to some extent the price of Zirconium fall. So, there is a general malaise as you know in the global commodity market and that is starting to help offset some of the negatives that we talked about. .

All right. Thank you. .

[Operator Instructions] Our next question comes from the line of Garo Norain of Palisade Capital Management..

Great, hi guys. .

Hi, hello..

You made in the release some comments about 2016, at the end of the release since the oil and gas industry being depressed defense spending, whether it recovers or not et cetera.

There is a lot kind of in that paragraphs and I was wondering if you could just help kind of just directionally, I mean, if you net things out, it doesn’t look like kind of up, flat or down directionally for next year. .

Well, I think, I was trying to give that impression in the strip that, we definitely see it as an up. The euro exchange rate is certainly potentially a negative, but the commodity price benefit is hopefully at least a bigger positive. So those two should really net out.

Then of course, our big step change year-on-year as we expect to be profitable in the alternative fuel business stream where we have made some very significant losses in 2015. So that’s probably the biggest single positive.

And then of course we have the indeterminate but hopefully positive benefit of taking action on intellectual property protection in the catalysts area along with the other actions that we are trying to take there to recover market share.

And then finally, we threw in that, we have another new product out there being the SoluMag dissolving magnesium alloy for the oil and gas industry. Our overall gas industry is weak at the moment, but they are still producing and we don’t have a presence there. So, any sales that we make is incremental business to us.

And having made what we hope for the breakthrough sales, we are just trying to build that into our numbers for 2016.

The other positive I think in the script was that the bioabsorbable alloy does – it might get into the market a little earlier than we’ve previously thought and that’s clearly rare, I have to admit or a lot of these long-term projects is more common for them to slip backwards and come forwards, but that particular one at the moment we are feeling optimistic about we’ll get into the market, possibly six months earlier than we had originally thought.

.

Great. Thanks so much for that..

Okay. .

[Operator Instructions] We have a question from the line of Phil Gibbs of KeyBanc Capital Markets. .

Thanks.

Just had a follow-up on what you are thinking about in terms of targeted margin potential in gas cylinders right now, given all the moving pieces in the commodity cost downside that you are expecting? I know you had wanted to get 2016 back to what – 2013 levels with the restructuring actions that you’ve taken, is that still possible or are we still a year away from that? Thank you..

I think, 2013 I think was the sort of record year. So, that’s probably a little overambitious for 2016 right at the moment, but we certainly anticipate seeing a significant improvement in the percentage return from the business because of course, we are suffering quite badly still from the alternative fuel side.

I mean, we are really quite positive now about the – admittedly the reduced scale of the North American business, but that we can – pretty positive.

But the European business, we absolutely made the right decision to shut down the German operation, because that market for bulk gas transportation modules and bus systems has just got weaker and weaker through the course of the year.

Sometimes when you close a plant, you see a flurry of activity as customers come in and order materials and equipment before the plant shuts, we’ve definitely not seen that here. The business has just got worse and worse. And so, that’s got a very negative effect on the margins for the division.

Removing that, and getting the AF business stream into a positive by itself, we will generate an improvement in the margins on the net benefit in cylinders, between the mix of exchange rates and commodity prices it should be a positive as well, because the euro exchange rate, this benefit that we often cite is spread across several businesses and the material cost benefit will be more towards cylinders.

So, again we will see percentage improvement from that side. So, we don’t think that we can see a significant uplift in cylinders year-on-year, but the biggest single element to all that will be the turning round of those AF losses into some degree of AF profitability. .

Perfect. Thanks so much. .

Okay. .

At this time, I am showing no further questions. I would now like to turn the floor back over to management for any additional or closing remarks. .

Okay, thank you very much everyone for listening in and for those questions and we will talk to you again when our quarter four results come out in the New Year. Thank you. Good bye..

An Encore recording of this conference call will be available in about two hours. You can access the recording on the Luxfer Group website at www.luxfer.com. Thank you for participating in the call..