Luxfer Holdings PLC (LXFR) 2012 Q3 法說會逐字稿

Welcome to the Luxfer Group third-quarter conference call. We will first hear from Luxfer Chief Executive, Brian Purves, who will provide a market overview for the quarter. Followed by group Financial Director, Andy Beaden, who will review the financial performance for the fourth quarter and year-to-date. Brian will then return to sum up and offer an outlook for the rest of 2012 and 2013. After that, Brian and Andy will take your questions. To make sure that as many questioners as possible get a chance to speak in the time allotted, we request that you initially ask only one question. After you have heard the answer, we will give you the opportunity for a follow-up question. If you would like to ask additional questions, our operators will place you back in line. We thank you for your cooperation.

We will now turn the call over to Brian Purves.

Thank you. Well, good afternoon, ladies and gentlemen, and welcome to the Luxfer conference call on the third quarter of 2012. And in particular welcome to those new investors who supported our IPO at the start of October and to the analysts who are now covering the group. The first nine months of 2012 have delivered another strong set of results from the business. The macroeconomic backdrop remains a concern, but the group is well diversified and several markets are still performing strongly. As expected, order intake in the area of defense is slowing. The European automotive sector is quite weak. But North American demand remains strong and global automotive industry figures are still positive.

Aerospace is generally strong and the medical market has been quite buoyant. The market for containment of alternative fuels is generating a lot of activity. The cylinder business is enjoying a good year in terms of both demand and business improvement. In Europe, medical demand is very strong, particularly following the award of UK original home oxygen therapy service contracts to various gas companies at the end of 2011, where all of the service companies have come to us for their lightweight cylinder requirements for home oxygen therapy. The US side of the business is also doing well with increased sales of breathing air cylinders for SCBA kits.

The electron division continues to perform well, despite the expected fall in rare earth prices, but has had to be handled carefully to avoid the potentially damaging effect of stock write-downs. With the price of cerium down to only 10% of their peak, we believe that the bulk of this risk is now behind us. But we must remain vigilant as with both [Lyoness] and Molycorp believed to be very close to volume supply capability. We have every reason to believe that the price of cerium will continue to fall. While market statistics are not readily available, we are the view that we have lost some market share during this period of high costs, having, perhaps, taken a more aggressive position on recovery of the costs then some competitors. And to some extent suffering a structural disadvantage against competition that has an access to rare earths at the much lower domestic Chinese prices.

Now that rare earth prices have reduced and the gap between domestic and export prices has narrowed, we intend to work to recover market share over the next two years. While the fall in rare earth costs is reducing our surcharge and therefore sales revenue, it is to be welcomed, as the high cost of our rare earth containing products over the past 18 months has been a concern to both us and our customers. And the cost of volatility has been an unwelcome distraction when trying to get customers interested in new rare earth containing products. At current prices and lower and with an expanded supply base, this should progressively cease to be an issue. With the fall in the cost off, in particular cerium, we have of course been enjoying a windfall of cash flow, as value have tumbled out of our working capital.

Elsewhere in Elektron, sales of high-performance magnesium alloys are showing 14% growth this year and our line in magnesium photo engraving sheet appears likely to finish the year very strongly, while sales of industrial catalysts, although still lumpy, are also well up on last year. Group-wide other raw material costs have been relatively stable over the last few months. And indeed in some cases seem somewhat depressed, presumably by the declining economic growth forecast. We have accordingly started to hedge our aluminum exposure out as far as 2014. Work is progressing on an actuarial evaluation of our main UK defined benefit pension plan as at April 2012. Early indications are that the calculated deficit is not as high as it first feared, despite the impact of low gilt yields affected by quantitative easing amongst other things.

At this stage I remain confident that our existing deficit remediation program, dating back to 2009, will still be sufficient to show the deficit being eliminated within the original time frame. This program is earnings related and is capped at GBP5 million or roughly $8 million per annum. Of course the Company expects market movements in asset values and bond yields to play a big part in eliminating the deficit by reducing the need for Company contributions.

In the area of new product and market development, we announced earlier this year the work that we have been doing to develop bioabsorbable alloys of magnesium for the healthcare market, branded Synermag. We are currently well advanced in building a new quasi clean room facility to manufacture these alloys at our Manchester alloy plant. Phase one, which will be completed this year at a cost of just under $2 million, will give us basic production capability. Phase II, which will cost another $3 million, will not be undertaken until the market has developed further. Following a redesign, our prototype smart floor regulator is undergoing cycle testing and is achieving very promising results. Meanwhile, work continues on a digital version of our prototype IOS oxygen delivery system and we are still on target to submit the device for CE marking around the middle of 2013.

In the environmental area, following the encouraging statement regarding the use of magnesium in airplane cabins issued by the FAA in August, we are aware that work is progressing on standardized laboratory scale tests that would allow seat manufacturers to test magnesium alloys for flammability. We still expect formal approval for the use of magnesium alloys within a few months. In the area of alternative fuel containment, the potential of the alternative fuel market continues to excite us. Both the rapidly increasing demand for natural gas powered buses and trucks and the growing requirement for virtual pipelines for the transportation of gas.

Our recent mid-September acquisition of Dynetek Industries of Canada has expanded our presence in this market. Dynetek is the market leader in Europe for composite based CNG systems for trucks and buses. They have done much research and development work on composite cylinders for CNG and also our hydrogen systems offered in conjunction with major vehicle manufacturers. As acquired, the business was making operating losses, but we have a 100 day program in place to address that issue. I naturally expect operating losses to be eliminated by the end of the first quarter 2013. Turning the business into a profitable operating unit will be progressive and it depends in part on moving up their selling prices. But there are no long-term contracts in place. The acquired business and indeed our own AF plant is quite busy, both in quarter four of this year and in the level of inquiries being received for 2013. We are looking to generate over $40 million of sales from this business stream in 2013, up from around $15 million in 2012 with only a part year contribution from Dynetek.

In general, although there are as ever some markets below par our, business overall continues to perform well. While the third quarter saw a temporary end to our continuously rising trend in quarterly profit results since the second quarter of 2009, there was undoubtedly an element of benefit from rising rare earth prices in the quarter three result last year, causing it to be well above trend. And we have flagged that issue ever since then that quarter three of 2012 was not expected to match last year's exceptional quarter result, but was expected to be on trend for another record full-year profit results, which we believe it is. Further, our cash flow has been hugely positive, as rare earth costs normalize. Under our return on invested capital, these we believe class leading. Finally I would just like to touch on our IPO, which priced on October the 3.

While I know that many of our pre-existing shareholders who were disappointed with the discount we had to accept to get the offer away, the board is very pleased that the group has, at long last, achieved a listing for its shares and that the Company now has the funds to be able to demonstrate to all of our partners that we have the resources to back the very large number of opportunities that we are working on.

I will ask Andy Beaden now to give you more details on the financial results.

Thank you, Brian, and welcome, everyone, to the call. Turning to trading profit results. Brian talked through the factors affecting revenue and changes in the quarter. The gas cylinders has led to an improvement in trading profit. The gas cylinders division's third-quarter profit was $4 million representing a significant increase of $2.4 million or 150% over the $1.6 million trading profit for Q3 2011.

Increased sales volumes, sales mix improvements and higher selling prices raised trading profit by $2.3 million in the quarter. Other costs changes were a net saving of $0.1 million. FX hedging rates used to protect the business in 2012 against the weaker euro also helped, and we had some benefit from lower aluminum cost.

Electron division's trading profit of $12.4 million for Q3 2012 was $7.2 million less than the exceptional result in 2011, when the trading profit was $19.6 million for the third quarter. We noted at the time that that quarter in 2011 was not indicative of management's ongoing organic growth expectations and was out of line with all the other quarters in 2011. The main trading variants related to stock gains being realized in Q3 2011 around the rare earth pricing bubble and to a much lesser extent some lower volumes in 2012 Q3. As might be expected, it became difficult to recover all our historic rare earth costs, as spot prices fell and so this led to a downward pressure on profit in Q3 2012. These trading variances total a negative $6 million in Q3 2012 when compared to the prior quarter Q3.

FX changes, translation and transaction combined, had a net $0.2 million positive impact on Elektron, thanks to favorable exchange rates -- thanks to favorable FX hedging rates taken out last year. There were also additional benefit charges of $0.3 million and other cost increases of $1.1 million in the quarter compared to last year. Magnesium prices were slightly lower, while rare earth costs were significantly lower. But the impact on customer sales has lagged due to the need to sell old inventory bought at higher prices. Other material costs remained fairly stable. Group trading profit was therefore $16.4 million in Q3 2012 versus the $21.2 million for Q3 2011. Year-to-date trading profit was $52.7 million, ahead of the $51.5 million for 2011.

Now if I move to the full income statement. Total revenue for the group was $114.5 million for Q3 2012. Meaning year-to-date we are at $381.6 million. The gross profit margin in the quarter was 25.9% and year-to-date it is 24.8% on average and these are similar margins to last year. There was a better mix of sales margins in Q3 2012 compared to Q1 and Q2 2012. Trading profit margin was 14.3% and year-to-date is now 13.8% on average, which is higher than at the same point in 2011, which was 13.4%.

In Q3 2011, we made a $1.6 million exceptional gain on a change we made to our UK pension plan arrangements. Reported in the income statement in the line restructuring and other income and expense, which is, of course, not repeated this year. With no operating exceptional actions this year, operating profit for the third quarter of 2012 was therefore the same as trading profit, $16.4 million. We have reported an initial small gain below operating profit for the acquisition of the Dynetek business. This is based on early appraisals of the fair value of the tangible assets we acquired when compared to what we have paid including $0.8 million accrued expenses. As the acquisition occurred just before the end of Q3 2012, this is subject to further review and then audits at the year-end, so this number may change when we have all the fair value analysis completed. Finance costs are lower, both in the quarter by $0.8 million and year-to-date by $1.9 million due to lower borrowing, which is a result of a very strong cash inflow in this year. Finance costs were higher last year due to financing the rare earth inventories. I'll cover cash flows further in a minute.

The taxation rate for the quarter was 31% and year-to-date is 32% on average. Last year it was 30% at the same point. These small variations relate mainly to changes in the mix of profits by country, the UK profits being taxed at a much lower rate than say US profits. We are working on various opportunities to reduce the effective tax rate over the next few years. Particularly the cash taxes we actually pay.

(inaudible) these focus on the UK side and include the following. Utilizing new UK tax incentives, which is for companies that have revenues based on IP protected products, like Luxfer does. They're called patent box incentives with potential rates for such income streams falling to as low as 10% for the Corporation tax in three to four years time. These are being phased in from April 2013. Also utilizing R&D tax credits, which you can get in the US, but are more prevalent now in the UK. And an opportunity that has recently arisen for us around assessing our ability to unlock substantial $50 million of tax losses in the parent company, Luxfer Holdings PLC, which arose historically when we were funded via high yield bonds that created large UK derived tax losses. We had assumed that these tax losses would actually be lost at the IPO based on change of control tax rules. But on now assessing the IPO transaction itself, there is a good chance they could be retained.

To assess the availability of these tax losses we have to wait until 60 days post the IPO date, but that applies some fairly complex UK change of control tax rules to the shareholder movements that have occurred around the capital raising of the IPO. These rules focus on the shareholders that hold at least 5% of the equity of the group and are based on looking back three years to see what changes have evolved pre-IPO, then the IPO shareholder changes and then looking forward six days for anti-avoidance purposes. If more than 50% of the share ownership has changed hands over that entire period, based just looking at the 5% shareholders, the tax losses are void and canceled. But if retained, then we believe we will be able to utilize these tax losses to reduce the cash taxes paid in future years by at least $1 million to $2 million per annum. Currently, based on the IPO points, we believe we fall below the 50% level, maybe closer to 45%, but share trading activities up to the 60 days post IPO will have to be taken into account.

Now, moving on to net income. Net income for Q3 2012 was $10.5 million and adjusted for exceptional items after-tax, $10.2 million. Year-to-date we are now at $32.5 million and again adjusted for exceptionals after-tax, $32.3 million, ahead of 2011 by $1 million. The net income margin sales in Q3 2012 was close to 9%. The pro forma earnings per ADS for Q3 was therefore $0.39 based on assuming a total potential of 27 million ADS 's, just below the average of $0.40 per quarter run rate for 2012. For reference, adjusted EBITDA was $20 million for the quarter.

Now, looking at the balance sheet. In our earnings release we've put in there in the notes a pro forma balance sheet to also give people an idea of what the group would look like post the IPO. Now looking at the consolidated balance sheet in total, we actually have invested capital in operating businesses of about $180 million net of pension deficits at the end of September. The acquisition of Dynetek had added $11 million to our operating assets. On the pro forma IPO, which you can see would -- we actually raised about $60 million net of new funds with the greenshoe having been exercised on day one of trading, means that we now have net assets or book equity on a pro forma basis of approximately $152.9 million. Net debt was actually at the end of Q3 $88.2 million. But the pro forma net debt falls to $27.5 million.

Turning to cash flow. Operating cash flows for the quarter were a positive $6.8 million and this means year-to-date we have generated $51.7 million compared to an outflow in the first nine months of last year of $3.4 million. Working capital and changes in rare earth inventory and surcharges are the main reason for this variance. As part of our surcharge calculation, we did levy a financing element in 2011 which helped offset the interest cost of funding that significant cash outflow. So, CapEx year-to-date, you'll note in our release, is $10 million. We are planning on a lot of investment activity in Q4 2012 and we would still expect the full-year expenditure to be over $20 million. The cash flow cost in Q3 2012 for Dynetek was $11 million, but we still have $0.8 million of cost to pay in Q4. Cash flow before financing year-to-date stands, therefore, at $30.9 million for the first nine months. Our calculation of our return on invested capital comes out at 27% on invested capital after-tax in the quarter.

Thank you and I will now hand you back to Brian to sum up.

Thank you, Andy. In summary then, our year-to-date results, both profit and cash, remain quite pleasing, especially the improvement in gas cylinders. We have consistently said quarters one, two and four will be better than 2011, but not quarter three, which in 2011 was benefited by rising rare earth prices. We do expect quarter four of this year to be better than last year by between $1 million and $2 million trading profit, resulting in full year of between $3 million and $4 million better than prior year, a new record for us.

For 2013 we are in the process of developing our annual budgets, but at this stage we expect the Elektron division to be broadly flat year on year, with defense down and European auto low, at least for the first half, offset by gains in industrial catalysts on magnesium alloys. In cylinders we expect further growth across the board and especially in alternative fuel. And also further gains in productivity, partly driven by investment in automation.

Overall, we expect trading profit for 2013 to grow by between $5 million and $9 million over the outcome for 2011. Most of our key ratios, operating, return on sales, return on capital, operating cash flow and leverage ratio, look very healthy and the business is in good shape. We appear to be through the worst of the rare earth price spike and I'm pleased that we have largely protected the business from the multifold of dangers that resulted, at the same time, as I believe, protecting our customers from the worst of the impact. In many respects it remains a challenging environment, but our diversification is a strength in such an environment and with the number of growth projects that we are working on we remain very confident about the future.

Thank you and we will now take questions.

(Operator Instructions)

Luke Folta, Jefferies

A couple questions. You answered quite a few of them actually in your outlook statement here a minute ago, Brian, but I wanted to dig in a bit more on the zirconium business as it relates to auto. In the press release you noted a 25% pullback in volumes quarterly. I was just trying to get a sense of do you think this is the new run rate for that business in the short-term or was there a stocking issue that -- was there some destocking in the quarter that probably abates at some point in the near future and we get a bit of a ramp back up?

It is difficult to differentiate those two in the short-term, but we're pretty confident that some of it was destocking, because we definitely saw a number of orders being pushed back. And of course that's partly a reflection of the weakness of the European market. But it's also a reflection, I think, of the fact that with rare earth prices falling people are deferring their purchases in the expectation that the next quarter's prices will be lower than the current quarter.

So, we have the opposite effect that we had from a year ago. So, at least part of it is that. But there's no doubt as well that European auto demand is down and we see that even with secondary effects because our shipments to South Africa, for example, have been down but much of that ends up coming back into Europe. Within the European environment, when you analyze the market, the market is clearly not very healthy. The main impact is in the Southern European economies and in general I would characterize those as being small car markets. Small cars take smaller catalysts, so the overall impact in terms of the catalyst market I would think will end up being a smaller percentage downturn then the overall production numbers would indicate.

But certainly right at the moment we're hurting a bit from the weakness of that market and our principal markets are Europe and North America. Our market shares in those two areas a bit, obviously, more extensive than they are in the Far East, which tends to be more dominated by our principal competitor in this area, the Japanese company DKK.

Then just as a follow-up. On the industrial catalysts business, can we just add some color around how your efforts in that market are progressing and to the extent that you can talk about ballpark numbers, what the 2012 sales might be. Again the rough numbers, and what ballpark we could be looking at for 2013?

Well, we're just working through our 2013 budget at the moment, but we do see a significant uplift next year, something of the order of maybe 50%. Of course we're starting from a relatively slow base. It does tend to be lumpy business. We have one individual contract which was originally scheduled to go out in the fourth quarter of this year and will now be delivered in the first quarter of next year.

And that is a 40 ton order, so it's quite a sizable chunk of business for us. It just disappears in one lump. So, it is a lumpy business, but overall I think that we should see that sort of order pick up next year. It is quite a long lead time to break into this market and some of the bigger opportunities that we're talking to people about look more likely to be a 2014 delivery time scale than 2013, but we do think that with the repeat business that we're starting to come through, we should see that order of uplift next year over this.

Right, I'll get back in line, thank you.

(Operator Instructions)

Phil Gibbs, KeyBanc Capital Market.

Question about the cylinders business and how we should be thinking about the near-term profit drag from Dynetek and when you may have some of the restructuring behind you. And then also whether or not we should expect restructuring charges to show up in the next few quarters?

Yes, well, taking the last of it first. We do expect that we'll have some restructuring costs in the fourth quarter. Not huge, but of the order of --

$1.5 million.

Up to $2 million. The business has acquired -- it lost $7 million at the operating level in 2011. But with improved sales in 2012 we expected the run rate of losses as we acquired it to be of the order of $3 million to $4 million. So, that was the base point against which we take it on. As I say, I hope to eliminate those by the end of the first quarter next year. So, we do expect to take a little bit of a negative hit in quarter four, a smaller negative hit in quarter one and then, hopefully, at least breakeven and then positive thereafter, progressively, as I said earlier on.

Brian, can you reiterate the trading profit guidance that you gave for '13, I thought you said up $5 million to $9 million and I couldn't tell what that was, was that relative to 2012?

Yes. That's over the expected outcome for 2012 and that's a trading profit figure or essentially EBITDA would be similar.

Does that include the restructuring charges in 2012?

No, that's trading profit before the restructuring charges.

Okay. Thanks a lot, gentlemen.

(Operator Instructions)

Chris Glynn, Oppenheimer.

Hello, this is [Patrick Richards] stepping in for Chris today. Just wanted to see if you can give us some further insight on the emerging opportunity in industrial NOx? Do you have any further comments, there?

On the industrial catalysts?

Correct.

Well, we've been working very hard at this business for several years now and we are working with six or seven different players in the area of industrial catalysts. So, we are the material supplier and we are selling the zirconium-based technology that we've developed over the years for catalytic purposes to the industrial catalysts manufacturers. It's taken us several years to persuade them to look at the technology, see what it can do for them and to test it out in their various applications.

We are seeing a lot of interest. We do have some business, which has started to appear in our repeat basis. These charges, as we understand it, tend to last between 18 and 24 months, so, we've developed bits of business that appear in lumps, as I said earlier, every other year. But, obviously, the more applications that we find for the products, the less lumpy the revenue becomes. And as I say, some of the contracts that people are talking to us about are individual contracts, which are as large or larger than our annual volumes in that area at the moment. So, we do remain very excited about as an opportunity. We do think that we will see significant improvement 2012 over 2011 and we expect that again in 2013 and 2014.

But the breakthrough into making it a very material revenue stream is more likely to be 2014 and onwards, just because of the sheer time lag on getting through these approval processes. But it remains a very, very exciting opportunity for us. The applications are multifold. Although I think you referred to NOx, some of the applications are for emission control, that's true, and it's very analogous then to the work that the catalyst products that we make do in the automotive sector. But, other applications are process catalyst where it's actually involved in the yield of the product that they are making whether that be biofuel or petrochemical.

And indeed there are a couple of the applications that we've talked to people about, it has -- its actually been as much as anything the fact our material is environmentally quite innocuous. We've often found that we are being asked to quote for a catalyst which will be replacing something which is perhaps highly acidic in nature and our product, while it may not produce a yield improvement, in that particular application is nonetheless easier for the company to dispose of at the end-of-life. So those three areas of interest, process catalyst for improved yield, process catalyst to replace an environmentally unfriendly one and indeed, the emissions control, which is more akin to what we do on the catalytic side.

So, we do remain very excited about it. We have one individual contract which we are hopeful of getting an order for next year for 2014 delivery. And that is for 300 ton order. So, that is twice as much as we are doing annually at the moment. It's a reflection of the scale of the market opportunity that we are targeting.

Great, thanks, guys.

Julian Mitchell, Credit Suisse.

I understand that you will give more clarity on the guidance, but on the $5 million to $9 million increase in trading profit, I didn't know if you could put that in the context of where you think revenues might be for next year?

We do expect revenue growth next year, particularly on the cylinder side of the business. The biggest individual market sector that we see growth in is the alternative fuel side where, as I said, we expect $40 million of revenue next year compared to about $15 million in the current year. Albeit, of course, quite a large part of that is through the Dynetek acquisition.

But, the level of interest in the market is such that the number could be materially higher than that, especially if we can break into the gas transportation modules. We've made our initial sales of these big gas transportation modules in 2012, just a handful of units. But, each of these freight containers contains upwards of 100 of our alternative fuel cylinders. So, they are big volume items for us. We do have high hopes that we can break through into that market next year. So, that's the single biggest revenue growth that we see. But, we do see growth pretty much across the board on the cylinder side.

On the Elektron side we do see that fairly flat with progress in some areas offsetting the fact that defense sales are inevitably going to be lower next year. We've known that for some time. And also degree of softness in European automotive, although we do expect that to bounce back. It's just a matter of quite when it happens during the course of next year. But, we'll give some better guidance on the revenue next time that we speak, because we will have put our 2013 budgets together by then.

The one element which will almost disappear off the radar, I think, is the surcharge, because you can see in the quarter the surcharge is now down to very, very much lower levels than it was at its peak. And we do anticipate that the price of the Cerium will continue to drop during 2013, so that surcharge will become less and less of a factor and we would anticipate at some stage, once Cerium is seen as having stabilized, that we will simply incorporate that into our standard level of pricing.

Thanks very much.

Luke Folta, Jefferies.

Can you talk about where you -- two things, where pro forma cash is following the offering? And then also is there still some amount of inventory of working capital that you expect to reduce or basically harvest by year's end?

There is a little bit more to come from the rare earth, but the majority of it has worked through. Unless, of course, the price of Cerium drops further, in which case we'll get a little bit further benefit in 2013, but of the nearly $40 million that peaked at one point last year, majority of that slowed back out, now. I would say somewhere between $5 million and $10 million still tied up in the balance sheet, Andy?

Probably around $5 million, $10 million. Luke, just to answer your question on what cash have we got. Actually in the filing, the SEC filing, there's on the face of the balance sheet a pro forma balance sheet on the same basis we talked about in the call. I've estimated that's in a pro forma basis, which is really where we are now, you've got about $34 million of cash sets on the balance sheet.

Also you talked about the magnesium recycling business. I think you said volumes down about 11%. And as noted it's not a big impact on earnings, but can you give us some sense of what the impact is on revenues?

It's relatively small [bear]. Many of the contracts that we do there we're working on a price per ton for conversion. And of course the business is heavily exposed to European auto industry based where it isn't the public servicing.

It was about $10 million. It is a $1 million is 10% fallen.

So it's very small bear. As you say, it's almost negligible impact on profitability.

But we have a number of areas, similar size, which are all low margin, magnesium, commercial alloys sold, recycling, various other similar alloys, which do add up to $3.5 million, $4 million maybe in total, which were falling in that quarter, which I'd say have virtually no profit impact. So, the revenue, therefore, line in Elektron was lower probably than people expected. We had actually no real profit in those.

There are some areas of the magnesium business where we're essentially providing a service to our customers and it's part of the package that we offer them, along with the more high value added products. The recycling service itself doesn't do a great deal for us, but it's part of the service which we provide in order to reprocess the -- understand they process scrap from the die casters supporting the auto industry in Germany.

That was the sense I got, I just wanted to just to get us zeroed in on the revenue change is possible. So, the recycling in those other buckets were about $3 million to $4 million lower year-on-year. Is that what it is?

In the quarter, yes.

In the quarter, yes.

Last question. It's clear you guys have done a very good job at managing the rare earth situation and passing that along. Were there any inventory holding losses to speak of in the quarter?

There was definitely negative pressure, yes. Nothing like the scale of the benefit that we got a year ago. But the combination of the reduced demand from Europe and the fact that the Cerium price dropped quite late in September, meant that we were caught with a little bit more inventory at higher prices than we'd ideally would've liked just at the point where we were agreeing prices with our customers for the fourth quarter. I don't have the precise figure here but, it would be the order of magnitude of $1 million, it's not a huge impact.

And of course we'd had previously stated that, again, an estimate. But the last year you can see that, back Q3, which obviously did have higher volumes for that business in the quarter, was about, for the group, about $5 million of both trend in terms of profitability, which you have to put down to the upward cycle at that time. So, there is a delta between the two, that leaves $6 million just on those rare earths.

Great. Thanks a lot, guys.

(Operator Instructions)

[Stephen Coulter, Venus Capital].

Just on 2013, recognizing that you are still early in the budgeting process, but can you give us a sense of what your forecast for CapEx is?

Yes, we can certainly give some guidance there. We're still working through the budget and, obviously, part of the purpose of the IPO was to give us increased investment funds. Now, it's fair to say that the capacity expansion projects and they [may be] more likely to be towards the end of '13 and '14.

But there are some areas of the business where we will want to make investments next year and that particular includes in the cylinder business where we have a fairly high, relative to history, level of investment in automation and also in the liner capacity potentially for the alternative fuel cylinders. Andy, you want offer any more flavor than that?

Yes, we're well advanced in being experienced in automation within the cylinder business and that we will build continue at a pace at now and back end of this year, next year. (technical difficulty) We're also using that knowledge to do some automation in the magnesium business, which is a bit more of a complicated business to do it, but we will be investing in that to improve efficiencies.

And one of the things that we have to look at is, if in fact the large cylinder AF CNG market goes to the top end of our expectations, then we will have to be back in there investing next year on top of the fact, obviously, we've bought capacity through the Dynetek opportunity. And so we'll have a range -- we'll probably built -- kind of put a range out of CapEx, which we think, and it will be dependent, then, on how that demand goes around the first, second quarter. I have some figures, Brian. Do you want me to --?

I think that certainly the number's going to be 50% higher than this year. So, $30 million.

I would say it is a range of $25 million to low $30 million, depending on the overall requirements of the business.

And just in terms of the cylinder business, we're trending towards the 10% or so EBITDA margin. Longer term, as we get through a lot of this heavy investment that we've made and that we are anticipating to make, what is a goal that we should be striving towards in terms of EBITDA margins for that business?

Well, I'm not sure on EBITDA off the top of my head, but terms of the -- (multiple speakers).

Trading profit is 6%, 7%.

On operating profit I'm quite happy to say that I believe the potential is there to get it into double-digits. Something of the order of 11% or 12%. Getting it beyond that may be possible, but it's just too far away today for me to be confident about it. We don't really think that the cylinder business as its nature will ever get quite the level of operating margins that we achieve on the Elektron business, but we certainly do see the potential to improve it by 5 percentage points or there abouts.

One thing that I do point out to people is that within the cylinder business you do effectively have two businesses, as the -- there is the aluminum business based on the more traditional historic product and you have the composite business, which is more recent and is growing much more strongly and where the margins generally are stronger, where we have more intellectual property protection. So, the natural growth, because that's where all of our development effort goes on the composite side. The natural growth of the composite side is a proportion of the business that will generate some of that improvement by itself.

Which is not to say that we can't improve the aluminum side. That's where quite a bit of the automation goes. But that's the ballpark that I would indicate. 5% or 6% improvement over a three to four year period.

And just on for next year, any early guidance on pension funding requirements? Are we going to be making the $4 million to $5 million that we been historically making?

I think as far as the UK scheme is concerned I don't see any change there. We were likely to hit the cap that we have, which is GBP5 million, around $8 million for the 2013, 2014 year, which is the scheme year. So, that will be at the $8 million year level based on the likely outcome for 2014 earnings. It being an earnings related amount.

And then there will be an amount which goes into our US schemes of perhaps $2 million on top of that, but it is largely similar to where we've been historically. And, even though we do hope that market movements will reduce some of those requirements going forward, it's unlikely those would have an impact on the -- in the near-term. It's more likely that they would shorten the mediation period during which we have to make these payments.

We are running at, Stephen, about $10 million to $11 million, I think, cleared the US as well.

Okay. Great. Congrats on the IPO, I know it's been a very long time coming so, best of luck in the public forum.

Thanks so much.

Thank you, that was our final question. I'd now like to turn the floor back over to Mr. Purvis for any closing remarks.

Well, thank you, ladies and gentlemen. We have done this before with our investors, but it's been interesting to do it for the first time as a listed business. We look forward to doing this more regularly with you in the future. Thank you and goodbye.

Thank you.

Thank you. This concludes today's conference call, you may now disconnect.