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Luxfer Holdings PLC (NYSE:LXFR)

Q2 2014 Earnings Conference Call

July 31, 2014, 8:30 AM ET

Executives

Brian Purves - CEO

Andy Beaden - Group Finance Director

Analysts

Martin Englert - Jeffries

Julian Mitchell - Credit Suisse

Philip Gibbs - KeyBanc Capital Market

Operator

Welcome to the Luxfer Second Quarter 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.

To make sure that as many questioners as possible get a chance to speak, 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 thank you for your cooperation.

We now turn the call over to Brian Purves.

Brian Purves

Thank you. Good afternoon, ladies and gentlemen, and welcome to the Luxfer conference call on the second quarter of 2014 where we’ll take the usual format.

Turning to Slide 4, trading during the second quarter remained affected by disruptions in two key markets, while European demand generally remained somewhat depressed.

The Elektron materials business continues to improve in most areas. As I indicated during the quarter one call, there was, however, no repeat of the high industrial catalyst sales we saw during quarter one. The Cylinders results, however, partly due to market issues flagged in the quarter one release, remained depressed.

Our overall revenue was only modestly down on quarter two 2013, but a weaker mix of sales and incremental costs meant that our profits were materially down. Adjusted fully-diluted EPS of $0.27 was at the bottom end of the range for the quarter.

Looking at the sales revenue movement, Slides 5 and 6 track from the 2013 second quarter results at the top through to the 2014 quarter two results at the bottom. For Elektron, the surcharge for cerium, which was only $0.6 million in the quarter, has been dropped all together from customer pricing for the second half of 2014. Smaller surcharges for other rare earths are expected to remain.

Stripping out the surcharge and also exchange rate movements, underlying sales are around $1.9 million or 3.3% down on prior year. The outage at the countermeasure flare customer’s facility that occurred late February had a bigger impact in quarter two than it did in quarter one, leaving that sector well down on prior year. We saw, however, net improvements in several markets, including aerospace alloys and magnesium photo-engraving plate.

Turning to Slide 6, the Cylinder business had another weak quarter in terms of demand for higher-value cylinders. Net of exchange rate movements, sales revenue in quarter two was down by $0.9 million or 1.3% on last year with continuing low levels of activity in our mainland European facilities, although the situation did improve over quarter one with the U.K. aluminum plant much fuller.

As expected, demand for composite SCBA cylinders in the U.S. was still impacted by the delayed regulatory approvals, but less so than in quarter one. Some breathing sets approved to the new standard were being sold.

At $11 million, our alternative fuel sales were just over $1 million down on prior year, but this included the balance of shipments of modules for the Australian virtual pipeline contract. There was a continuing lower unusual level of medium-duty truck conversions and sales into the bulk gas transport sector in North America are not yet achieving the targets that we had set for our joint venture.

We remain convinced that the underlying demand for SCBA kits, mainly for fireman's breathing apparatus, is currently very strong in the U.S. Sales in quarter two were up on quarter one with June being the best month so far this year, but the quarter remained below prior year in the sector with customers not yet fully in the market with their new products.

From conversations with those customers, we believe that the industry will be clear of these issues by the end of quarter three and we remain hopeful that some of the (technical difficulty) are merely deferred and will start to be (technical difficulty) quarter four.

Turning to Slide 7 on strategic growth projects. On alternative fuel cylinders, there continues to be a high level of interest in the conversion of Class 8 trucks to CNG, although in the percentage of new trucks entering the market as CNG-powered vehicles remains quite low.

The North American infrastructure of CNG filling stations, however, is expanding rapidly and this is a good sign. The Turkish bus market, currently the most important in Europe for CNG-powered buses, remained quite slow on quarter two, but the last several contracts [indiscernible] for the second half of the year. Since the end of Q2, we have sold our first Type 4 CNG cylinders, a 22-inch [indiscernible] for the conversion of pickup trucks.

Our first 26-inch cylinders for Class 8 trucks are now in production, and we will be – we intend to sell around $5 million worth in the balance of the year. It will be a relief to move beyond the development stage which has been costly and start recovering the overheads of the Utah facility, which has had no product manufacturer since it was acquired in March.

On gas transportation modules, the balance of shipments under the Australian virtual pipeline contract went out during the quarter. Our customer does not start operating the pipeline until August. And so, our payment terms reflect the operating cash flows from the start-up business extending through into the first half of 2015.

There is (technical difficulty) modules and our North American JV is being relatively successful with small units, but to-date not so successful on the largest modules where despite the advantages of Type 3 based systems, we have been losing out on price to take 4-based systems based on larger and therefore fewer cylinders. We have rebranded our joint venture in this area, Luxfer-GTM Technologies, and our Cylinder sales and marketing people are now assisting the JV management. We are also re-examining their product offerings.

On magnesium, the regulatory bodies and the seating industry continue to roll towards the more extensive use of Elektron alloys in civil airliners. The recommendation that the aerospace designers’ rule book we changed has now been published. Once this change is achieved, the special conditions exemptions will no longer be required. Meanwhile, we continue to supply prototype material and to work on ways to improve the [indiscernible] ratio of material that we sell.

On the IOS medical oxygen delivery system, although considerably delayed from our original targets, we are now making good progress on our IOS device and the Smartflow module around which it is built. The design of Smartflow has been frozen and the IOS device is entering final testing with the objective being to obtain the required CE Marking in quarter two of 2015. Although national health authority approvals are required, but we expect that the device can be on sale in the U.K. before the end of that year.

To remind you the concept here is to add value to the lightweight medical cylinders that we already sell by offering a complete medical oxygen delivery system in an ultra-lightweight ergonomic package.

Turning to Slide 8 and addressing our recent acquisition, I’m very pleased to confirm that we did receive the regulatory approvals that were sought and well within the permitted time scales allowed for review. Accordingly, the transaction has just closed.

Some of the products that we have acquired are pictured on Slide 8. We have known these businesses and the people running them for several years. At various times, we have supplied them with material and we have competed against them with limited success, it has to be admitted, on flameless heaters. The main owner is preparing to retire and we have been in discussion about this purchase for well over a year.

At an estimated cost of over $60 million, this is the largest bolt-on acquisition that we have done and the business is, unlike those we have bought recently, being profitable as acquired, but we believe that the business has improvement potential.

On Slide 9, the business has a highly flexible capacity to respond to urgent demands for additional flameless heaters and self-heating meals. [Hours can be] [ph] required to support military activity or respond to natural disasters where power supplies have been damaged. This ability to respond quickly and supply large quantities at short notice is important to the customer base.

In previous years where there has been a coincidence of troop movements and/or natural disasters, the business revenue and profitability has been more than double the level expected from the current year. We intend to extend the business geographically using our more global footprint, and one particular avenue that we intend to explore is progressively replacing the current largely alumina-based active ingredient of the decontamination kits with our zirconia-based sorption technology, thereby, adding value to the product while we believe improving its performance.

Andy Beaden will now take you through some of the detail on the quarter two results.

Andy Beaden

Thank you, Brian, and welcome everyone to the call. And before I start, could I just ask anyone who is also facilitating, on this call, have got an open line, could they put that line on mute because there was interference during Brian’s presentation. Thanks.

Brian covered the divisional sales analysis. And my first slide, Slide 11 shows how that consolidates to the Group revenue changes for Q2 and year-to-date. Total revenue for Q2 2014 was $121.9 million, with net revenue of $121.3 million and the rare earth chemical surcharge was, as Brian indicated, only $0.6 million. The Group's underlying revenue for Q2 2014 was down at 2.3% or $2.8 million, excluding the surcharge changes and adjusting out the positive $3.7 million FX translation gain.

Year-to-date, underlying net revenue, adjusted for translation, is down only 0.9%, with Elektron up 2.2%, and Gas Cylinders down 3.4%.

Slide 12 shows the trend in sales for Q2 2014 by geographic region. You can see the largest variances are North America being down, due to the U.S. self-contained breathing apparatus and countermeasure sales being reduced, with Asia-Pacific up as a result of the Australian virtual pipeline contract and general robustness in that region. Europe is slightly down.

We have been helped by stronger sales in lower-margin areas such as magnesium recycling, but was down in some higher-margin areas such as composite medical cylinders.

Turning to the trading profit results on Slide 13, the Q2 2014 Group trading profit was $11.2 million versus $15.3 million for Q2 2013. Brian talked through the factors affecting revenue and sales changes in the quarter.

Elektron’s results at $9.5 million is weaker than last year and the prior quarter, but given the impact from lower countermeasure sales and the non-repeat of the large industrial catalyst order in Q1 2014, most areas of the division performed very well. Year-to-date, the division has matched last year results of $20.2 million with, on average, an almost identical margin of approximately 18% on its trading profit.

Gas Cylinders trading profit for the second quarter of 2014 was $1.7 million, a disappointing decrease of $3.1 million from the $4.8 million trading profit for the second quarter of 2013. The underlying revenue was only modestly down, the composite revenues fell larger. This has had a bigger margin impact and along with additional overheads focused on commercializing our new range of AF products and medical oxygen device combined to weigh down on profits and margins. For the half year, the impact of these costs is approximately $2.3 million.

The Group’s margin fell to a return on sales of 9.2% from 12.4% for Q2 2013 on the back of the reduced profits in Gas Cylinders, the year-to-date average being slightly better at 9.6% with the stronger Q1 results.

Turning to the full income statements on Slide 14, the gross margins were also lower, with Q2 2014 at 22.4% versus 24.8% for last year. Gross profit was, therefore, $3.2 million lower at $27.3 million. Distribution costs at $2.2 million were higher, a result of more longer-distance exports to Asia-Pacific region, but consistent with Q1.

Administrative costs were $13.7 million, being lower than Q1 2014 with some cost savings on what was a high first quarter, but similar to prior year. Trading profit was $11.2 million for Q2 2014 as previously explained.

We have implemented some overhead savings in both the Gas Cylinders division and the Magnesium Powders business in response to the weaker profits in those businesses. In the quarter, we had about $0.8 million of restructuring costs. The full benefits of these cost savings should come through for Q4 2014.

Operating profit, which is after restructuring and other exceptional items, was therefore $10.4 million versus $15.1 million for Q2 2013. There was also $0.1 million of acquisition costs incurred in the quarter in relation to the purchase of the Utah facility at the end of Q1 2014.

In Q3 2014, we will chart through all the acquisition costs of the Truetech and Innotech purchase, which is estimated to be $2 million. Under IFRS accounting, you do not capitalize M&A costs, but instead they are written-off as a one-off charge.

Under acquisition accounting, we would fair value the businesses, balance sheets, and separately identify certain intangibles such as brand and IP. This was also named non-cash amortization charge over their estimated lives based on the $64 million value of the businesses, that amortization is estimated at around $1.4 million a year.

Below these line items, I have broken out the elements of the IFRS finance charges being net interest on the actual financial debt, being $1.6 million for Q2 2014, slightly up with higher borrowing and less cash in the quarter.

The notional IS-19 retirement benefit finance charge of $0.7 million is $0.2 million lower than Q2 2013 as a result of the reduced pension deficits year-on-year, plus there was a new line item relating to the notional interest costs of $0.1 million relating to the unwinding of the discounted deferred consideration on the Utah acquisition and is effectively part of the overall acquisition costs.

The effective tax rate was 27.8% versus 32.8% last year, in line with my guidance following tax saving initiatives last year. Net income for Q2 2014 was $5.7 million, compared to $8.6 million for Q2 2013, but adjusted for exceptional items and excluding the IS-19 finance costs, was $7.6 million, and this is $0.28 per ADS. The fully diluted equivalent is $0.27.

For reference, adjusted EBITDA was $16.2 million, compared to $19.8 million for Q2 last year. Year-to-date EBITDA is down 14% to $33.1 million versus $38.5 million for the half year 2013 as a result of the weaker Gas Cylinders performance.

In fact, with higher depreciation and amortization charges in 2014, Elektron’s half-year EBITDA was up on the half year 2013 to $25.6 million versus $24.8 million for the half year last year.

The next slide is number 15, shows the consolidated balance sheet. Overall invested capital in the operating businesses was $256.8 million, net of the pension deficits of $72.4 million as that of 30th of June 2014. The pension deficits increased by $4.8 million from the $67.6 million at the end of 2013, but $2.1 million of this is FX translation differences on the U.K. deficit. Changes in corporate bond deals remain the main underlying reason for the fluctuating deficit.

Net assets or shareholders’ equity of the Group increased to $198.9 million with FX translation gains on the balance sheet adding $2.6 million and trading adding $4.6 million from the end of 2013. Net debt, being debt minus cash, was $55.4 million. We have utilized in the quarter some of the banking revolving credit facility to help fund the increase in working capital. The analysis of the balance sheet also shows, separately, the acquisition of the Type 4 AF composite facility in Utah.

Turning to cash flow on Slide 16, our operating cash flows in Q2 2014 were a negative $4.7 million, down on Q2 2013’s positive $6.9 million, as a result of lower profits and higher working capital. The working capital increased due to a number of factors. These include settling supplier payments on the virtual pipeline contract in Australia, however, the customer payments are extended over a 12-month period.

We also are carrying excess inventory, as a result of the various demand disruptions, which has now been fully paid for, but will take time to be reduced. There will be an added focus in the next 12 months to improve the ratio of working capital to revenue, which on a normal year, I would expect those to turn over 5 times. This should help cash flows going forward.

Investment cash flows were a net spend of $4.1 million in the quarter. We invested $4 million in Q2 2013. CapEx in property, plant and equipment was higher at $4.8 million versus $4 million for Q2 2013. There were a further $0.2 million of costs associated with the purchase of Utah. We did receive back from the Luxfer-GTM JV $1 million and it paid us $0.1 million in interest on its debt funding.

Cash flow, before financing, was therefore an outflow of $8.8 million, compared to an inflow of $2.9 million for Q2 2013. After paying dividends and interest of $4 million, we borrowed a net extra $4.7 million and the net cash outflow in the quarter was $8 million. Net cash at the end of the quarter was therefore $11.1 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, has impacted both the numerator and denominator in the calculation with the ratio being low for the current businesses at just 13% after tax for the quarter.

Clearly, organic growth, reducing working capital and seeing Gas Cylinders return to a better level of profits would all improve this ratio. The acquisitions would also initially dilute the return below the historic 20% previously achieved.

Turning back to the acquisition of Truetech and Innotech, we have financed it initially by our extended revolving credit facilities at a cost of around 2%, but we may look to utilize long-term debt financing options for some of the debt given the current attractiveness in the U.S. debt markets and the strong backing from our own debt financing partners.

In summary, the financial results of Q2 are a disappointment on our expectations, but you can see Elektron had a reasonable good first half year. Adjusted EBITDA for Elektron is up and it has weathered some negatives in the defense sector and Europe.

Gas Cylinders profits are down, though revenue more flat. We have implemented some targeted cost savings to respond to this, but there is now a major focus on commercializing the new products in both divisions, which does come at an upfront financial cost and management time, but it is to support our longer-term growth strategy. It is good to now start to see new products being sold in areas like Type 4 AF cylinders and alloys being used in aircraft seating.

With the Elektron acquisition completing during Q3 and that with an attractive debt package, it means it too will be fully contributing for Q4 2014.

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

Brian Purves

Thank you, Andy. Turning to Slide 19, in summary then, the results continue to be affected by disruption in two key U.S. markets and by general weakness in Europe. Gas Cylinders is up in its aluminum markets, but as disclosed on many occasions, the margins on that side of the business tend to be, on average, lower than for composite cylinders. So the additional aluminum sales, although keeping the revenue up, haven’t compensated for the disruption in the SCBA market and the weakness in European healthcare.

Additionally, we are incurring heavier-than-usual development costs in that division, particularly on Type 4 cylinders and IOS medical oxygen delivery device. The specialty materials side of the Group is doing well enough in its other areas, but the EBTIDA result today is up on prior year despite one of its key markets, military powders, being well down.

Looking at Slide 20, on the outlook for 2014, while the countermeasure flare customer that had the accident in February is back in low level production, they have some months of work to do before getting back to normal. Meanwhile, our forecast demand from other military customers has softened partly because they are over-stocked and we now think that our sales of military powders this year will be only around $10 million, some 40% down on prior year and less than half the level of 2012.

At the 2014 forecast level of sales, we believe that supply is below usage. So, we can’t expect the market to improve overtime. Progress on other Elektron division markets is being held back by the weakness in military sales, and so it is now unlikely that the divisional result will be much different from 2013 when measured on a like-for-like basis.

The disruption in the SCBA market is lessening with several approved products now in the market and June was our best month so far this year. In discussions with our customers, it seems likely that all of their products will be available by the end of quarter three as the quarter four should be free from disruption. It is about a question of how much demand has been deferred and how rapidly it can be recovered, but it seems like that this will extend well into 2015.

The heavy expenditure on product development costs will continue into quarter three, but the Type 4 costs will start to ease as we start production at our new Utah facility. The combination of all these factors should deliver a much improved Cylinders result in quarter four. This will be too late to recover the shortfall against prior year that would have built up by then, and so Cylinders will end the year overall well down on 2013, but performing much more strongly as we enter 2015.

Looking at Slide 21, quarter three is seasonally a low quarter for us, so although we expect underlying improvements, there is no expectation of a significant change to our current run rate, but in quarter four we expect to see a clear improvement in the Cylinders result.

In Elektron, we will start to benefit from the contribution of the new acquisition with a full quarterly benefit in quarter four. We have launched, as Andy said, an effort to improve working capital turnover which has for various reasons slipped over the last 12 months. The improvement program will cover the next 12 months.

Taking a quick look on Slide 22 at the outlook for 2015, there is still some way to go before we have a budget for 2015, but in broad-brush terms we remain optimistic. The important SCBA market is expected to be back on a growth path and hopefully capturing back some of the sales deferred during the market disruption experienced in 2014.

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 and we can anticipate some improvement in European demand. The Elektron or our military proto sales are likely to remain low against historical benchmarks, but we do expect there to be some increase in sales because of an end to the customer disruption and destocking seen in 2014.

In Elektron too, we anticipate at least a modest improvement in European demand, and of course, we can look forward to a full year contribution from our new acquisition. Although unlikely to make a major financial impact in 2015, we do expect to make good progress on a number of our strategic projects, including getting a couple of them commercially launched.

Thank you, and we will now take questions.

Question-and-Answer Session

Operator

(Operator instructions) And your first question comes from Martin Englert of Jeffries.

Martin Englert – Jeffries

What are your expectations for the Cylinders segment in the second half relative to how the first half performance was, and also year-over-year versus second half of ‘13?

Brian Purves

We do expect the second half to be quite a bit better than the first half, but with most of that improvement coming in the fourth quarter for the factors that we’ve mentioned, both the reduction in the development costs as we get into commercial phase, the additional sales from Type 4, the cost savings that we couldn’t place, which will start to have an impact in quarter four and the improvement in the SCBA market.

So, while there are rightly some underlying improvements in quarter three, quarter four is the one that should be relatively clean, so we do expect the second half in Cylinders to be quite a bit better than the first. Against prior year, we would hope that it can match or improve slightly on last year, but certainly against the first half, there would be a very considerable certainly uplift.

Martin Englert – Jeffries

And you had mentioned about, I believe, it was $2.3 million in cost impact from product innovation in the first half of ’14, what did that look like in 2Q for Cylinders and what would you expect that to be heading into the 3Q, 4Q there?

Brian Purves

The costs that we’ve mentioned have been incurred, most of them, in both quarters. The unutilized facility costs with Utah came-in in March, so that wasn’t a full impact, but the development costs have been underway through most of that time, and going forward we will continue to have the costs on the IOS development, because that doesn’t finish its testing program until well into next year, but the Type 4 developments are clearly getting towards the end, because we are moving out of development and into production, and so we will start to see those tail off in the third quarter, and instead, of course, what we will start to see is the benefit of sales coming through, which will help us to recover the overheads of the Utah facility, so I think you see on that particular element of it, which I think we identified it approaching half of the amount tail off in quarter three and not be there in quarter four.

Martin Englert – Jeffries

Just for the Utah facility cost, what was the – how do that look on 2Q singling that out?

Brian Purves

It would be several hundred thousand dollars, probably a little less than $0.5 million.

Martin Englert – Jeffries

And then, you had mentioned some overhead cost savings which should be fully reflected in 4Q, could you give a split between the two segments about how much you would anticipate on an annual run rate?

Brian Purves

That figure is really the impact of the Cylinders reductions that we’ve made, and they are progressively being implemented, some of them had already been on action, and others get implemented during the third quarter, so the $2 million is an annualized figure and should be benefiting the Cylinders numbers by about $0.5 million in quarter four, and that’s the bulk of the figures that we’ve mentioned.

We have taken a few employees out of the powders business which is looking at quite a slow level of production in the second half of the year, but that’s a much smaller net saving benefit. I would estimate that at $100,000 a quarter once we get into quarter four.

Martin Englert – Jeffries

And finally there, if I could, for the acquisitions, Innotech and Truetech, would $8 million EBITDA run-rate by 4Q be a reasonable assumption at that point?

Brian Purves

Yes, it’s a reasonable assumption. That’s certainly the figure that we mentioned as an expected outcome for the current year. You will appreciate that we’ve only just walked through the door and the systems in the business are not sophisticated as we are used to, but I think that -- I can’t give any better guidance other than quarter four would be roughly a quarter of that $8 million.

We still have a lot of work to do to understand the seasonality, bear in mind though that, as Andy mentioned, some of the profitability gets converted into amortization. So, the actual figures, the trading profit that we report will be slightly lower because of the acquisition accounting, the EBITDA is unaffected and the cash is unaffected, but the trading profit will be a little bit reduced by these capitalized intellectual property, et cetera.

Andy Beaden

We gave guidance about $1.4 million a year, so it’s a quarter in Q4.

Operator

Your next question comes from Julian Mitchell of Credit Suisse.

Julian Mitchell - Credit Suisse

I guess I had a question around the revenue outlook in Cylinders, so as you sound sort of very confident about it improving by Q4 on the operating side, I just wondered how much of that was related to an assumption as a big change in customer spending habits kind of versus your own timing of costs, how much of your sales weakness now is SCBA and how much is sort of general weakness, and what’s the outlook for both of those?

Brian Purves

The European weakness has been around a while and the most thoughtful aspect of that is European medical composite cylinders, which are relatively weak at the moment, and we are not really assuming much in the way of an upturn in that -- in the balance of the year, because we tend to see reasonable lead time on the orders for those and they are going to remain weak for the balance of the year.

But the SCBA side, which as you recall, is our single biggest market normally, has been quite a major impact year-to-date, and if you look at the quarterly calls from our major customers, I mean they are consistent with what we are saying that they all expect to have all their products approved and in the market by the end of the third quarter and that includes some new generation products that are still in the approval process.

So, just the absence of disruption is going to be a major step forward, and if you overlay on top of that, but again bear in mind what our customers are saying, they do expect quite a bit of the shortfall in sales to be deferred sales which they can then start to cut back. We’re anticipating that we’ll see at least a modest start to that such that the run rate of sales in quarter four will be a little higher than it would otherwise have been.

So the SCBA market turning around in quarter four is quite a big element of it but that seems a reasonable basis for that, certainly consistent with what the customers are telling us. If you overlay on top of that the fact that we will have a full quarter of the cost saving benefits, we’ll have ended the bulk of the Type 4 development costs, we will actually – we anticipate selling the Type 4 cylinders profitably, and all of those together make for a significant uplift in the Cylinders numbers.

Julian Mitchell - Credit Suisse

And then just my follow up would be on capital allocation, you completed these two deals, what’s the outlook in terms of, I guess, sort of target balance sheet leverage and how much of an active M&A strategy do you think we’ll get from here?

Andy Beaden

Julian, on the balance sheet leverage, as you know, we’ve really said for some time now but the – we see that certainly no more than 2 times at pro forma or an acquisition and then, really managing the 1 times net debt-to-EBITDA. This acquisition will take us to a pro forma 1.3. 1.4 times, which we’re quite comfortable with, but we wouldn’t want be going over 2 times and we do see that acquisitions can be funded through long-term free cash flow as long as we can keep within those ratios.

Brian Purves

And then just to add in, Julian, that the business that we are acquiring is highly cash generative. The level of capital investment, we believe, will be relatively modest, so there would be high conversion rate from profitability through to cash flow. So that will obviously assist the ratio.

In terms of total acquisitions, we remain actively looking for those. I suspect that from where we are, it’s pretty unlikely that we will manage another one this calendar year and could be well into 2015 before we’re able to put another one under our belt, but we will only do so provided that we can do it within the sort of framework that Andy has laid down on the funding side.

Andy Beaden

Maybe just to add, Julian, as you know, we actually do spend quite a bit of time on individual acquisitions. So, as Brian alluded, the acquisitions that we’ve made, I would take the current one, we’ve been working on or following for quite some time, so it’s a very carefully plotted out strategy.

Operator

(Operator Instructions) Our next question comes from Philip Gibbs of KeyBanc Capital Market.

Philip Gibbs - KeyBanc Capital Market

Just wanted an update as far as what you are seeing on just the European macro front as far as the automotive business and then the industrial side, because I know you commented last quarter that the industrial cylinders business is weak as you had seen it in sometime?

Brian Purves

We feel a little bit of a recovery in the industrial side, it’s still not where we would like it to be, but the main shortfall at the moment in Europe is in the medical composite side, which largely comes out of our French plant, and that’s the one that’s struggling a bit at the moment.

We’ve actually managed quite successfully to fill the Nottingham facility, which is an aluminum plant, so at the moment, it’s more European medical, and to be honest, over time, that’s not hugely related to the economic cycle, it’s more to do with policy matters and buying cycles, so we do expect that will come back and when it comes back it probably comes back quite rapidly, but we don’t think it’s going to be there for the balance of this year.

On the automotive side, there are very, very small improvements coming through, it’s just painfully slow certainly in terms of the impact on us. I mean we said our automotive business is stable. We’ve obviously wanted to be growing, and it’s not at the moment. The little bits and pieces of business that we’re winning are actually outside the European market, but it remains a major focus for us.

We are sort of re-examining our pricing strategy to try and make sure that we win some additional business in 2015 and those possibilities do exist. We are talking about such possibilities, but I don’t think there will be much change in the balance of this year.

Philip Gibbs - KeyBanc Capital Market

As far as your pricing strategy, how have you had to adjust that, I mean, as far as what competitive forces, is it usual suspects in the market on the zirconium catalysts side or is it the Chinese getting more aggressive?

Brian Purves

It’s the usual suspects although one of those is [indiscernible] cost base, but the Chinese advantage that they did have with the re-pricing has largely been eliminated, so we’re at least on a reasonably relative roughly clean playing field in terms of the cost base, that’s a matter of what margins people are prepared to accept, and certainly in the North American market, prices are pretty aggressive at the moment being led by that Chinese base of supplier and the Japanese, and if we want to win a slice of that business, we’ll have to be more aggressive on pricing, but we got to be careful about it. We’re not interested in chasing higher levels of commodity volume.

We do make good margins out of this industry, so we have a bit of margin to play with to generate some incremental business at the edge, but it remains our long-term strategy to reduce our dependence on the automotive sector by developing other aspects of the business, and we hope to make more progress on that front in 2015.

Philip Gibbs - KeyBanc Capital Market

And I just had a deal financing question for Brian. I think you said that the deal was going to be financed with 2% of the revolver, is that going to be moved into longer-term debt?

Andy Beaden

Yeah, Phil, it’s Andy, I did, yes, absolutely. Some of the debt we will look at maybe moving into longer-term finance. As you know, we have a NAIC-2 rating in the private placement market in the U.S. already fully established. So, that market is open to us quite without much extra work, so we may move some of the cost of the acquisition into seven to 10 year money rather than – as you know the current banking facilities were only just extended, so they themselves are committed to five years.

Philip Gibbs - KeyBanc Capital Market

And just lastly, Brian, with this deal having been effectively completed already, any sense you can give us as far as, I apologize if I missed, as far as your liquidity, your cash, and then what you have available on the revolver? Thanks.

Brian Purves

I think maybe you missed it, but Andy said. From our modeling, the acquisition takes us to a pro forma kind of 1.3, 1.4 times EBITDA. The acquisition itself is highly cash generative, it’s got rather low capital expenditure needs and so the high conversion factor from the profitability through to cash, of course, with the efforts that we will be making to improve our working capital turns, the business, the core business, the cash generation should start to improve going forward.

So the ratio we’d expect to come down in the absence of other acquisitions, which at the moment it doesn’t look likely that we will add any further sizable one certainly in this current calendar year, we remain looking. There is always a chance that something attractive might come out of that field, but at the moment it seems unlikely that will happen until well into 2015. Does that answer your question?

Philip Gibbs - KeyBanc Capital Market

I was just more curious as to what your revolving credit facility availability was after this deal.

Andy Beaden

It’s a $150 million committed facility and with an option of another $50 million if we needed it. So it’s $150 million at the moment, and we’ve got a draw down after this deal of around $60 million because we just slightly drawn down at the moment, but we’d expect the underlying businesses to be cash positive in the second half of the year. So it’s around $90 million of availability after the deal closes.

Brian Purves

And as Andy said, we are looking at converting some of that into long-term debt maybe to the chin of $25 million, $30 million.

Andy Beaden

Yeah, between $20 million and $25 million will be the most likely amount to convert into say seven to 10 year notes, which we can do in the next couple of months if we wanted to do.

Operator

Thank you, and there are no other questions at this time.

Brian Purves

Okay, well, if there are no other questions, thank you, ladies and gentlemen, and we will speak to you again in three months’ time.

Operator

An encore recording of this conference call will be available in about two hours. To hear the recording, please call 800-585-8367 in the United States. In other countries, call 404-537-3406. This information will also be available on the Luxfer Group website at www.luxfer.com.

Thank you for your participation in this call. Have a great day.

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Source: Luxfer Holdings' (LXFR) CEO Brian Purves on Q2 2014 Results - Earnings Call Transcript
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