Welcome to the Luxfer Group Fourth Quarter Conference Call. We will first hear from Luxfer's Chief Executive, Brian Purves, who will provide a market overview; followed by Group Finance Director, Andy Beaden, who will review financial performance. Brian will then return to sum up and offer an outlook. After that, Brian and Andy will take your questions. [Operator Instructions] We now turn the call over to Brian Purves.

Thank you. Good morning, ladies and gentlemen and welcome to the Luxfer conference call on the fourth quarter of 2013 and full year 2013. I will now take you through the summary of the results on the market situation and Andy will go on to talk about the detail on the financials. Trading during the fourth quarter followed a similar pattern to the earlier parts of the year, with, disappointingly, our European operations continuing to struggle. Several customers deferred shipments out of December. Our overall revenue was lower than we expected with 2 matters to be noted. Firstly, in November, it became apparent that the expected launch of the 2013 standard breathing air kits was going to be delayed because of a mistake by the testing authority. The SCBA or life support market is our single biggest market sector with nearly $60 million of mainly composite cylinder sales in 2013, driven by our global contracts with the 3 largest suppliers of such equipment. Since the industry became aware of the delay, demand for our cylinders are slowed. Secondly, we had expected to be shipping bulk gas transportation modules to Australia under a new contract. Our customer took rather longer to finalize their contract with the mining operation involved and, while the order is now secure, shipping will now be over March to June of 2014. Although, sales were down, sales mix was good and costs were controlled. So operating margins were higher and the operating profit impact was held at $1 million to $1.5 million. Despite the lower trading profit, with the benefit of the work that Andy and his team have been doing to reduce the marginal tax rate, adjusted fully diluted EPS of $0.40 was actually well above the consensus forecast for the quarter. In looking at the…

Thank you, Brian. And welcome, everyone, to the call. Brian covered the divisional sales announcements and my first slide, Slide 9, shows how that consolidates into the group revenue changes in Q4 and the full year. Total revenues for Q4 2013 was $160 million, with net revenue of $150 million. And the rare earth chemical surcharge was only $1 million. The group's underlying net revenue was down 9% or $11.4 million. Adjusting for FX translation, difference is of a positive $0.7 million, with both divisions having a weaker quarter due to the factors Brian outlined before. For the full year, the revenue was therefore, $481.3 million, a fall from the $511.6 million last year, but this was mainly a result of the rare earth surcharge being reduced to customers by 31. -- $32.1 million after rare earth cost fell. Translation differences were a negative $1.5 million for the year. And therefore, underlying trading revenue was up a small amount at $3.3 million. Turning to the trading profit results on Slide 10. In Q4 2013, on the back of lower sales, trading profit was down at $15 million, when compared to $16.1 million for Q4, 2012. Elektron's profits was down from $11.8 million in Q4 2012 to $10.2 million in Q4 2013. The division's trading margin was only slightly down at 19.7% versus 19.9% last year. Gas cylinders profit was up at $4.8 million compared to $4.3 million for Q4 2012, consistent with its improved performance in 2013. Trading profit margin was also improved at 7.5% versus 6.1% to Q4 2012. And therefore, the group's Q4 trading margin was 12.9%, higher than the 12.4% for Q4 2012. Looking at the full-year performance, we have provided a series of bridges from 2012 to 2013 for each division and the group. These are…

Thank you, Andy. In summary then, looking at quarter 4, European demand remained weak on the number of orders that were slipped [ph] by customers into 2014. Improved sales mix and lower costs limited the damage to trading profits, and good tax planning allowed us to actually exceed the market expectation on earnings per share. Looking at the whole year, while the trading profit is below our initial expectations, the board feels that there were many positives in 2013. The 2 Dynetek plants are now fully integrated and despite there being a driver margin for much of the year, the Cylinder division's operating margin, improved by around 1 percentage point in line with our guidance. The alternative fuel sales got to the $50 million figure that I forecast and could have been more. Although, there was some late disruption to the SCBA market in the U.S., there was strong underlying demand. The prize of cerium, our biggest rare earth purchase, appears to have stabilized almost back at levels that were there in 2010 before the Chinese export quarters were introduced. We are seeing strong interest in our magnesium alloys for civil aerospace space applications. Our profit issues are focused on our European operations. The North American plants have actually held their own pretty well. And finally, some real improvements have been made to our marginal tax rate. Looking at 2014, we remain positive about 2014 with an expectation of: firstly, further growth in 2 of our main markets for composite cylinders, compressed natural gas on breathing air or SCBA. And secondly, our progressively improving European markets for Elektron products. In the short term, as announced by MSA and others, sales of the U.S. SCBA market are being affected by the delayed regulatory approval of the 2013 standard kits. We believe…

[Operator Instructions] Your first question comes from the line of Julian Mitchell of Crédit Suisse.

I guess the first question was on the Elektron business. In 2013 you had a sales price, a hit, obviously, of over $30 million. I just wondered what are your assumptions as we move -- for 2014 on that pricing point specifically, in terms of the EBIT bridge?

Yes, we had a modest variance between the pricing on the material cost reduction. Fairly modest. I mean, I think it was $2.7 million...

On net basis across all businesses.

Yes. The -- we have, I -- we mentioned in the call last time, we have seen quite a lot of pricing pressure from the automotive sector. And so in order to retain, and indeed win new business, we have dropped prices a little bit. I mentioned in the document that we have won some new business in that sector, which is actually the first that we've won for some time, and that involved dropping the price a little bit. But we're talking relatively modest amounts, couple of dollars per kilo, and the margins that we retain at that level are still very attractive, and at or above the average margin for the products out of the Elektron division. So I think it's more important at the moment that we start to grow volume again, than that we try and hold the prices which have been there over the last couple of years.

Got it, and then within the Cylinders business, you had about a, I guess what, a 22% incremental margin or something like that, in 2013. I just wondered if that low 20s incremental margin is what you expect for the business looking ahead? And related to that, the sort of $3.9 million drag on profit last year from employment and other net costs, is that a run rate we should expect for this year as well?

From a margin point of view, we've been fairly clear that we do have an aspiration to improve the margins in the Cylinder business, but it is a multi-year program. So the kind of 1 percentage point improvement that we achieved last year was roughly what we were targeting. And we would like to achieve that each year for the next several years, in order to improve the operating margin of the business, from where it started at 6%, to getting into double digits. And the road will not necessarily be smooth, but that is our objective. And we think that there is enough work going on, on the automation side, and in terms of the mix switch towards composite to enable that to take place. In terms of the employment costs, certainly, we have increased the infrastructure to support our addressing of growth markets like alternative fuel. We are incurring some quite hefty development costs on projects like IOS, and that will stay for some time, certainly until the IOS project grew into the market. The other thing that always crops up when we look at year-on-year employment costs, is a question of bonuses. We do offer bonuses to local management at business unit level, based on performance. And the bonuses earned in the consumer business last year, which enjoyed certainly, North America strong growth, were quite healthy, where the previous year they weren't. And so year-on-year, you do tend to get that effect, if there's a fluctuation in the performance of the business. Of course, the -- there were very few bonuses paid in the Elektron division, or sadly at our head office. So hopefully in 2014, we might see some further increase on that side. But it's all very much linked, of course, to the profitability of the business.

Your next question comes from the line of Luke Folta of Jefferies.

Quick, I guess, firstly on the new cylinder facility, seems like an interesting opportunistic purchase there. Can you talk about -- so it seems like $3 million was the initial cost. Can you talk about what you expect CapEx requirements to be at the facility, to get that geared up to make the Type 4 cylinders? And then also, you gave some numbers around what the sales figures could be for Class 8 trucks using the cylinders this year? Can you give us any sense of what that could amount to, in terms of market potential for Luxfer? Just, I guess, for a longer term, maybe not so focused on '14?

Well, just looking at the facility in the first place, I mean, as acquired, it does have existing capacity, which we can use. And that capacity is approximately 4,000 of these large Type 4 cylinders. And so the level of capital expenditure involved is not great. Obviously, there will be an invested -- investing in the business to fund it, to grow the business. But From a CapEx point of view, relatively modest to utilize that existing level of capacity. If we should want to, and we hope that we will want to expand the facility, then the capacity can be, we believe, doubled to more like the 7,000 to 8,000 level. And the investment should be relatively modest. But it would be of the order of $3 million, $4 million, $5 million.

That's right. And Brian, you have, as well as paying the $3 million upfront, once the production ramps up, you've probably got another $3 million of working capital, which we'll see as coming though the cash flow side.

Yes. And the market for these Type 4 cylinders, I mean, the 8,000 to 10,000 trucks that I mentioned, is still a relatively modest share of the total North American truck market, where people are talking about potentially getting to more like 30,000 trucks a year, over the next 4 or 5 years. And each of these trucks will take between 2 and 4 of these large cylinders that we talked about. So it is a big market, and the cylinders themselves are quite pricey. They're -- because they are large cylinders, and custom made for that market, they are probably around twice the price of the bus cylinders that are more established in the marketplace. So in the sort of $4,000 to $5,000 range. So it's got a big revenue market. We certainly think that the potential is there for us to grow that sector into several tens of millions of dollars, but it will take a little time to do it. We hope that this year, starting round about the middle of the year, we hope it will be several million dollars of revenue that would come here. But developing it into several tens of millions of dollars over the course of the next 3 years. And the deferred consideration that's referred to in the document is very much an air node. It's sharing some of the benefit of that with the owners of the business that have sold to us if the business performs the way that we and they think that it can do.

And actually my next question was, how much profit would have to be generated over that 3-year timeframe for the full $6 million earn-out to be paid?

We would have to be -- we'd be safely generating an annual profit out of the business of $5 million or thereabouts.

That's right, yes.

So the share of the enterprise value -- incremental enterprise value is quite reasonable.

Okay. And in the CNG side of the business, you've got the $10 million Australian order, that's going to flow through for next year. Should be assume that the $50 million or so of revenue that you generated in 2013 can be repeated for next year?

Yes. I very much hope so. Maybe in a different mix, but we have, as you know, been putting additional capacity into the Riverside plant. And that's kind of happening as we speak. And I've previously talked about trying to aspire towards $70 million, $75 million level, and that remains our aspiration. And that will be a mix of the existing truck -- bus, trash truck market, the gas transportation modules. And in second half of the year, the Type 4 cylinders, as well.

Okay, and if I could just -- one last one. On 2014, you've given the initial expectation that you'll have year-on-year earnings growth, though despite some weakness in the first half. Is there anything you can say that could, I guess, give us some sense of magnitude of what you're expecting for the full year? And I guess, the first half of 2014 versus the second half of '13? Are we going to see a step down before a potential step up in the second half?

I think on the full year, it -- we feel it's a little early to do more than say we expect a year-on-year improvement. With the headwinds that we refer to, quarter 1, I think is fairly, definitely going to be down on prior year. But the other quarters, we would hope to be an improvement. Obviously, we're not quite sure on quarter 2, what the impact is going to be of the deferred military part of the business. But we should start to see catch up on the SCBA business in that quarter. So overall, I'm feeling fairly neutral on that one. But even back in the conference call last time around, we did say that we felt that the second half of 2014 was likely to be the stronger. Because that's really -- we think we still need that long to see the European market start to really pick up. And some of the incremental business that I referred to earlier, on the Zirconium side and the Automotive side, is business which is more 2015 model year production. So that will start around about September of the current year. Just one other point on your earlier bit. The virtual pipeline contract in Australia, we said, at least $10 million, it's in the $10 million to $15 million range. And the precise figure won't be established until the pipeline is in operation, and we see what the maximum capacity required is. But it will certainly be well north of $10 million. Probably won't exceed $15 million.

Your next question comes from the line of Chris McDougall of Westlake Securities.

So on the Type 4 cylinders that you're going to be launching in the new facility for trucks, what sort of a ramp time should we expect there? So if you -- when we start up that facility?

Well, we've -- we're actually producing some prototype cylinders at the moment in our Riverside plant. But the production will be migrated over to the new plant. And the one that they're doing at the moment is a smaller diameter, more like a 21- or 22-inch cylinder, which is probably going to go into the pickup truck market. The larger diameters will be launched in the new facility. And we're still finalizing the designs on those. So we expect those to be launched at sometime during quarter 2. And usually, what we have to do is to launch with a parent design, and then we spin off different lengths and diameters off of that parent design. So it will be progressive. And the 2014 impact from a sale revenue point of view, will still be relatively modest. I think as I said earlier, that we should manage to get several million dollars worth of sales, but it's unlikely to be as much as $10 million. However, getting the business to the several tens of millions of dollars within 3 years, clearly we'd expect the contribution in 2015 to be quite material.

Sounds good. And then on competing versus other people making Type 4 cylinders, what are the major factors that you're going to be able to compete on, from product design and quality? Or is this just a market that's growing so fast, that there is a bit of a threshold, and then it's a matter of having production volume?

Well it certainly helps that there is an expectation of rapid growth in the market. It is quite a crowded area already, with businesses which really haven't had much of a presence in the gas containment market. So today, in this sector, we've probably got Quantum as the market leader. And I -- now, the Luxfer product, which is still subject to final design, we expect to be the latest product by capacity of any of the competition. We expect to have intellectual property around the boss-liner interface, which is the area of a Type 4 cylinder, which is the most susceptible to leakage. And while Type 3 cylinders, with an aluminum liner, that's not an issue, with Type 4 it can be. And so we do expect some intellectual property in that area. Beyond that, you have to, I think, factor in that reputation, in the whole area of high pressure gas containment, is important. Luxfer has been around in this sector for the last 60 years. And we have an exemplary track record, both on service and the security of the product. And these products do carry sort of 250 atmospheres of pressure. It's pretty important that you know what you're doing, and that people recognize that, and the reputation that you built in the marketplace. We've also got, we like to think, a very well-developed sales distribution and marketing effort, being a global business, and indeed the largest gas containment business in the world. So we think we've got a lot of things going for us. And we certainly wouldn't be entering this market without an expectation to develop a leading position in it.

Your next question comes from the line of Jonathan Sacks of Stonehill Capital.

Just a couple of different questions on a few different topics. For 2014, can you tell us a little bit about your CapEx expectations?

Yes, Jonathan. I think we gave out some guidance on that on the last call. And we're targeting between $25 million and $30 million, at the moment, right in between the middle of that. So it's about $27 million, $28 million.

Okay. And do you view that as an elevated level? Or do you view that as of sort of a normal go-forward level?

It certainly isn't a steady-state level. So in there is clearly a number of growth projects, particularly in -- on the composite cylinder side, there's still, as you know, expansion of those facilities ongoing. And there would be more investment within the Elektron division this year. Okay, certainly, above that steady state, but as you know, we're targeting the expansion of certain key new businesses.

Right. And then, in terms of the sort of extra pension payment, or the below-the-line pension payment, if you will, which I think historically has been $10 million to $12 million, what is the go-forward level of that, in light of some of the changes you had to the pension structure?

It's going to be very similar at the moment, Jonathan. So we're in the middle of an agreed level of pension payments for the different schemes. So if you remember, it's roughly a deficit repayment in the U.K. of $8 million. And the U.S. does vary between $2 million and $3 million. So on average, it's $10 million to $11 million of deficits repayments. But as you can see, from the year-end results, we have made very good progress in reducing that deficit, from consolidated $97 million to $66 million...

The U.S. element that we took action on last year was -- it was opportunistic, it's something that we chose to do at the time. We could have chosen a different time. And over the course of the next several years, we want to just explore such opportunities, to reduce the scale of the -- absolute scale of the liability, and therefore, manage the risk associated with that downwards. So we were pretty pleased to be able do that in the U.S. last year. And maybe the next time that we do something like that, it will be in the U.K. But it's very much opportunistic when we see a cost-effective way of doing it, and we have the funds available to fund it.

Great. And then, on the -- the facility that you acquired in Utah, can you just explain a little bit? What was that facility doing prior to your acquisition? Was that part of our larger company? Was that a standalone business? And how was what you're making different then what they were making? And also, did it have existing sales and/or EBITDA? And can you give us a rough sense of that?

The facility, which is in Brigham City, in Utah, was purpose-built for the Type 4 cylinders. However, it was built as a subcontract facility, to manufacture Type 4 cylinders for 3M. And the facility has been empty for several months. So the subcontract arrangement with 3M hasn't, so far, really worked out for them, and they're very short of volume. So we were able to step in and pick the business up, relatively modestly. For a very -- relatively modest price, but they do have some good expertise. They've got a workforce experienced in manufacturing Type 4 cylinders. The management there seems a decent bunch of people. They have some knowledge that's of value to us. They have manufactured around 2,000 Type 4 cylinders to date, but not many in recent months, so they were suffering a bit, and we were able to step in and pick up the business for really quite a modest price, given the growth potential of this business, and the value that -- the future value that it can bring to us.

And the cylinders that they manufactured, are they the same type as the cylinders that you intend to manufacture, but they were smaller diameter?

They will be -- they are of the same type, in the sense that they are Type 4, plastic-lined cylinders with carbon fiber wrapping. But the design will be completely different. Because the 3M product has very many aspects where 3M have the intellectual property. So the design that we have is completely different to that, or certainly doesn't involve any 3M intellectual property. And that's perfectly feasible. We already have our own carbon fiber wrapping patterns. For example, we use different resins on the [indiscernible]. The liner will be made by a completely different manufacturer. So that -- at the end of the day, superficially, they will look quite similar. But they are very -- they are completely different designs.

Okay, great. And then, last question. Can you just tell us a little bit about what's happening in pricing, either generally for the business, or by division? And the reason why I ask is, it's wonderful to see the margins so strong, and I'm trying to get a sense, is that purely a function of mix? Or is there also an underlying pricing movement in that?

I think the quarter 4 margin is mainly mix. And you shouldn't really assume that, that will be perpetuated, go forward. We do have -- that fluctuates quarter by quarter, depending on the businesses going through there. There is a modest reduction in pricing in the zirconium automotive sector, which we have done to start to grow the volume there again. And that's, I would think, will be perpetuated going forward. But it's relatively modest. I would certainly think less than a percentage point impact on the margin. And it's well worth doing that, to get growth back through. Because as we've said before, the zirconium business is a relatively high fixed cost business, very high margin product. And it's all about getting volume through the plant to recover the overhead and get it back into sensible profitability. And that's what we're about.

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

Just wanted to hear your progress on the industrial catalysis products in the medical stents.

On the medical stents, first of all, that is, in a sort of Stage II in-body trial at the moment. And the feedback that we're getting is quite positive. So that, as far as we're aware, remains on track. Of course, it's our Biotech partner that is conducting those trials. But we do get regular feedback. The design of the material is frozen at the moment. And we are supplying the prototype material out of our dedicated facility here at Manchester for that. So that's -- there's probably, over the course of the last year, it's probably slipped by a few months. But we're still looking at a 2016 launch. And it remains a very, very exciting prospect. I'm sorry, the first one you asked about was...?

[indiscernible].

Yes, we're making some progress there. It's all very lumpy. We have some business that was deferred from quarter 4 into quarter 1. So quarter 1, in that area, will be quite healthy. And over the course of the year, we do expect further growth. We're still working with a very great many catalyst makers. The big breakthrough project that we're hoping to get, there's still no sign of that, but it is still out there. And our customer told us that they've put it into their budget for 2014. But we're still waiting to finally get an order for that. And of course, as far as we're aware, it's for a new plant, which is being built by his customer, and so the whole timetable is fairly fluid still, but it's still out there. We're just waiting on it to finally happen.

And just Andy, any color you can give on tax rate for this year?

20% -- I'm working. Starting at a rate of 28%.

And so finding there are no further questions, I will now return the call to management for any additional or closing remarks.

No, that's fine. Thank you very much. I think, the market is just opening. So we'll call a halt there. And we look forward to updating you, actually not that far away, on quarter 1.

Okay. Thank you.

A recording of this conference call will be available for replay in about 2 hours. To hear the recording, call (800) 585-8367 in the U.S., 0 (800) 917-2646 in the U.K., or (404) 537-3406 in other countries. Enter conference ID code 402-2689 when prompted. This information will also be available on the Luxfer group website at www.luxfer.com. Thank you for your participation. You may now disconnect your lines, and have a wonderful day.