Luxfer Holdings PLC (LXFR) 2013 Q2 法說會逐字稿

Welcome to the Luxfer Group second-quarter conference call. We will first hear from Luxfer 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 be glad to take your questions. To make sure that as many of you 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 an 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.

Thank you. Good afternoon, ladies and gentlemen, and welcome to the Luxfer conference call on the second quarter of 2013. I will take you through the headline results. Andy will then go through the details of the financials, and after a brief statement on the outlook, we will take your questions.

We had hoped to see more of an uplift during the second quarter, but in the end, the improvement was minimal. Our European focused business units in both divisions remain short of orders. While North America remains generally strong, and the global Cylinder business is growing well, the operating margin in Cylinders remains rather lower than in the specialty materials businesses. And accordingly, the Group's trading profit is $2.6 million lower than quarter two of last year, although a $0.4 million up from quarter one of this year. Adjusted EPS of $0.37 was around $0.02 lower than the consensus forecast for the quarter. In looking at the half-year adverse profit variance of $5.9 million, it is important to note that there is around $2 million of incremental cost being incurred as a direct consequence of our listing last October, some of which is run-off expenditure, such as SOX implementation.

Looking at the sales revenue movement, slides 5 and 6 track from 2012 second-quarter result at the top of the scheduled through to the 2013 results at the bottom. In our Elektron Division, the headline sales revenue line is again dominated by the reduction in rare earth surcharges. As the costs [have all been] particular cerium has collapsed now to around 5% of its peak, although still around twice the cost per kilo that it was at the start of 2010. Stripping the movement in the surcharge out, underlying sales are lowered by some 3.1% versus a year ago, a considerably smaller negative variance than in the first quarter, but leading the division 8.7% down over the half year. The majority of the decline is in the European arm of our zirconium automotive catalyst business, although sales of magnesium powders for countermeasure flares were also well down, partly offset by higher sales of our high-performance magnesium alloys.

Turning to slide 6, the Cylinder business enjoyed another good quarter in terms of overall demand. Sales revenue was up by 14% on last year, despite a shortage of orders in our European aluminum facility. The main story continues to be the growth in demand for composite cylinders, certainly in alternative fuel, but also the self-contained breathing apparatus, or SCBA market is very strong. This quarterly year-on-year increase in revenue is a little higher than in quarter one, boosting the half-year improvement to 13.7%. In Europe, however, demand for medical cylinders was lower than this time last year, when we were still enjoying very strong demand following the award of UK National Health Service of oxygen therapy contracts to various gas companies at the end of 2011. European demand for aluminum is generally weak, with lower sales of specialty gas cylinders being particularly hurtful. The SCBA demand, mainly for farm and breathing apparatus, is largely driven by the US, but global demand projections have caused us to decide to invest in additional capacity for these portable composite cylinders. Although we are already investing in equipment for the larger alternative fuel cylinders, this is largely dedicated and fully committed, and different equipment is needed for the portable cylinders, which are around 5% of the size of the big compressed natural gas cylinders.

Turning to new product and market development, on alternative fuel cylinders, the market continues to grow, and our three large composite facilities in the USA, Canada, and Germany remain full. Phase1 of the project to deliver additional capacity for aluminum liners for the big AF cylinders became available last month and is worth around $7 million of sales per annum in terms of incremental capacity. The main tranche of additional capacity is expected to be available before the end of the first quarter 2014. Work continues on integrating and improving the ex-Dynetek plants, and these businesses are now profitable, although still at below-average operating margins.

On gas transportation modules, demand for these modules to continues to grow, and we are committing substantial resources towards meeting the demand that we see in the balance of 2013 and 2014. We have established a joint venture with a specialist in this area, the owners of a business called GTM Technologies. We own 49% of the JV, so we will not consolidate the revenues of the JV itself, but will continue to record the sale of our cylinders into the JV and equity account for our share of the JV profits. The JV is largely focused on North America but may also get involved in supply in the Far East, where our partner has an established market presence. We will build modules for Europe and other markets either ourselves or with subcontractors. As well as the equity contribution of $2.5 million, we have committed to provide leasing facilities of up to $10 million to enable the business to grow as rapidly as possible. I would recommend that you viewed GTMtechnologies.com as there is a very useful information there on the advanced use of aluminum line composite cylinders for this application. As stated on our last call, between our Riverside, California plant on the two ex-Dynetek operations, we are looking to generate over $50 million of sales from the alternative fuel business stream in 2013, up from around $20 million in 2012, where we only had a part-year contribution from Dynetek.

On Magnesium and Civil Aircraft, we are pleased to point to the minutes of the International Materials Fire Test Working Group, which was held at a meeting here in Manchester, England, June 19 and 20. These minutes are publicly available on the FAA website and state with the FAA would now allow the use of magnesium in aircraft seats, subject to special conditions. We understand that this procedure is quite normal for changes that take place between general revisions to the rule books, which take place only every few years. The special conditions will certainly include the requirement of the alloy to be used can pass the flame test, which not all alloys of magnesium can, and may well include other requirements that we would want to be in there to direct end-users towards alloys with established aerospace credentials. The minutes indicate that the progress demonstrated in independent laboratories on the lab scale test method is now considered to be satisfactory. We will now accelerate our efforts to encourage the seat manufacturers to incorporate our aerospace alloys into their next-generation, lightweight seat designs.

Although not on the slide, the growth being seen in the SCBA market has resulted in a need for additional capacity for so-called portable cylinders. The Board has now signed off around $7.5 million of expenditure, mainly in the USA, but for some in France, to enable us to meet the projected growth in 2014. This brings to $11 million the amount approved this year for capacity increases on composite cylinders. Andy Beaden will now take you through some of the detail.

Thank you, Brian, and welcome, everyone, to the call. Brian covered the divisional sales analysis, and my first slide, slide 9, shows how that consolidates the Group revenue changes in Q2. Total revenue was $123 million for Q2 2013, with net revenue of $120.4 million, and the rare earth chemical surcharge was down to only $2.6 million. The Group's underlying revenue was up 5.5%, or $6.3 million, excluding the surcharge reduction of $8 million and adjusting for FX translation differences, a negative $1 million. This increase includes the benefits of the Dynetek operations purchased Q3 2012. Pre acquisition, the old Dynetek operations were averaging $5 million of cylinder revenues a quarter.

Slide 10 shows the trend in sales for Q2 2013 by geographic region, though the change in sales mix in each region is more relevant this time. Though US defense sales were down, the net growth was in North America, this being a result of stronger composite cylinder sales. European sales would have been further down, except for increased low-margin recycling business.

Turning to the trading profit results on slide 11, Brian talked through the factors affecting revenue and sales changes in the quarter. In line with the sales changes, Gas Cylinders profits were higher, up 45.5%, $4.8 million, and Elektron's lower by 28%, down to $10.5 million. Operating margin in Gas Cylinders was higher than prior year, with more added-value composite cylinders being sold. Elektron's margin was lower than in Q2 2012, with a weaker sales mix and lower utilization of higher added-value production facilities. For example, we have one more recycling business, and so volumes and revenues were much stronger for that plant, but this is a lower-margin business when compared to zirconium chemicals or magnesium sheets and powder, where demand was weaker. But with Elektron's average margins still well above Gas Cylinders, the growth in cylinder sales was not enough to avoid a fall in trading profit when compared to Q2 2012.

For Q2 2013, Group trading profit was therefore $15.3 million, versus $17.9 million for Q2 2012, but still up on the $14.9 million Q1 2013. The quarterly result turned out to be around $2 million worse than we had expected, with a weakening in the trading result compared to earlier forecasts in the latter part of the quarter, the two main impacts being further weakening in European industrial markets in both divisions and US defense countermeasures being weaker for Elektron.

Turning to the full income statement, on slide 12, the total gross margins were slightly lower, with Q2 2013 at 24.8% versus 25.1% for last year. If you measure this on a net-revenue basis, excluding the surcharge, then the margin was 25.3% for this quarter versus Q2 2012, which would have been 27.4%. This 2.1% change being mainly due to a change in the sales mix by division. Gross profits was, therefore, $1 million lower. We do get fluctuations in our quarterly administration expenses with FX gains and losses, marketing, sales, and development cost timings, and in this quarter, these were $1.9 million higher, whilst in Q1, they were $2 million lower than prior year, so trending flat year-on-year to date. This is despite the fact that we did incur higher costs due to implementing SOX 404 and various system improvements, along with and amortization charge for fair value of equity incentive awards made in January. The fair value of these is linked to the share price. I have stripped this amortization charge out of the adjusted EBITDA and adjusted net income figures, as shown in the reconciliations to GAAP in the appendices slides.

We did have $0.2 million of restructuring and exceptional costs. Operating profits, which is after those restructuring and exceptional items, was $15.1 million for Q2 2013, versus $17.9 million for Q2 2012, but higher than the $14.5 million for Q1, 2013. Interest costs relating to our debt facilities was $1.5 million, versus $1.9 million last year, a lower number due to lower borrowings, and we received interest of $0.1 million. The non-cash IAS 19 pension finance accounting charge was $0.9 million, the same as last year. The effective rate for tax for Q2 was 32.8%, versus 32% for last year. We are making tax savings in the UK through utilization of past tax losses, but the Group rate has increased, due to a higher proportion of profits now being generated in the USA.

Net income for Q2 2013 was $8.6 million, where adjusted for exceptional items and excluding the IAS 19 finance costs, was $10 million, and this is $0.37 per ADS. We have been targeting $0.39 to $0.40 per ADS. Last year, Q2 was $10.9 million in the same basis. For reference, adjusted EBITDA was $19.8 million, compared to $21.4 million for Q2 last year. Year to date, trading profit is now $30.2 million, $5.9 million down on the half year for 2012, this variance being due to weaker European industrial and US countermeasure markets. Based on the past four quarters, the LTM trading profit was $62.6 million.

The next slide, number 13, shows the consolidated balance sheet. Overall invested capital in the operating businesses was $191.1 million, net of pension deficits of $71.8 million, as at the 30th of June 2013. The point-in-time pension deficits fell by $24.9 million from the $96.7 million at the end of 2012, this being due to better asset returns, slightly higher bond yields, along with our own deficit repayments. Net assets, or shareholder's equity, of the Group has risen to $164.5 million, up $15.7 from the end of 2012. Net debt, debt minus cash, is now $26.6 million, or GBP70 million. For $108 million, that's 1.55 exchange rate. Banking facilities remain undrawn.

Turning to cash flow, our operating cash flows in Q2 2013 were a positive $6.9 million. This was after paying $6.4 million of corporation tax installments near the end of the quarter. Looking to investment cash flows, we made investments of $4 million in CapEx. Though the cash payment looks lower than originally planned, the rate of cash spend will increase as some bigger projects come to completion. Cash flow before financing was, therefore, $2.9 million. After paying dividends and net interest of $3.8 million, net cash flow was an outflow of $0.9 million. The next slide shows return on invested capital, which was 22% in the quarter, compared to 28% for 2012. Thank you, and I now hand you back to Brian to sum up.

Thank you, Andy. In summary, then, quarter two, while an improvement over quarter one, was below expectations on operating profit and EPS. As indicated, we are currently experiencing reduced volumes on certain Elektron product streams, and generally in our European-focused business units suffering from weak demand. While Cylinders is, overall, showing strong revenue growth on margin improvement, the net impact of the mix change on Group profitability is, for the moment, negative. I said that we would reconsider the outlook for 2013 once we had the Q2 result and could see how the second half was looking. Although we remain confident that the Cylinder division will show strong revenue on profit growth this year, the European market for aluminum cylinders remains weaker than we had hoped. The prospect of an near-term recovery in European automotive demand has receded, along with the hope for restocking effect, and the US military cuts look to be deeper than expected.

Quarter two was a little better than quarter one, and both quarters were similar to Q3 and Q4 of 2012. We've had to push back the timing of any recovery in European markets and can therefore see little reason for optimism that our near-term profitability will improve by much from the current level in the balance of 2013. While we do expect forward improvement in Cylinders, that appears quite likely that the Elektron will, for the moment, go backwards under the dual pressures of weak European markets and lower US defense spending. It is likely, therefore, that there will be a continuation of the adverse mix effects seen in the first half. Accordingly, we expect the 2013 second half profit result of be similar to last year, leaving our expected full-year trading profit at a reduction of between $5 million and $8 million against 2012.

Our focus remains on delivering the unchanged medium to long-term potential for the business, driven largely by our strategic projects. In that regard, the statement by the FAA on the use of magnesium in aircraft seating is very satisfying, being the result of many years of effort by magnesium Elektron staff, creating the interest and pushing for a renewed look at a material that had, in more primitive forms, been rejected by the civil aerospace industry decades ago. While much work remains to be done before this outcome is likely to lead to significant incremental sales, this is a significant achievement and is evidence that we can deliver on strategic projects in pursuit of our longer-term objective to broaden the base of the business. We are achieving a significant improvement in the Cylinder division, even with a weak European market, and we fully expect the contribution from Elektron to recover in due course. Thank you, and we will now take questions.

(Operator Instructions)

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

Just a quick question -- you've got a $10 million delta in your old and new trading profit guidance? So I just wonder if you could parse that out at all. Is that all in Elektron? Is there some in Gas Cylinder? And then, within Elektron overall, what's the split of that $10 million between military and European industrial or automotive?

Okay. I will do my best.

But certainly, the Cylinder business has a little bit of a contribution to it because the demand on the European facility here at Nottingham is really quite weak at the moment. That includes the big industrial cylinder -- specialty gas cylinders -- which we sell to the major gas companies. Most of them seem to have shut up shop on capital expenditures at the moment. And these are quite big and chunky items, good margin business, so that's a little bit hurtful, and we haven't reckoned on seeing that carrying rate the way through this year, but we now think that might be the case.

But the majority of the impact is in the Elektron division. Certainly, the last time that we spoke to the market, we were assuming -- and we were quite explicit that we were assuming our recovery in the European automotive sector, to the extent that it would encourage a restocking effect, and progressive commentary on the European market, has just been worse every time. So we really don't see that happening now in 2013. Obviously, it is going to happen at some point, but we don't see it happening in 2013 now. So, that's gone.

And then, finally, we are a bit disappointed that it seems that the impact of sequestration on the military purchases is going to be harsher than we had feared. Now, that's not certain, but we think that we've got to take a downside view on that. And it would appear that they have been harsher in cutting back on purchases to get stocks down than we had originally hoped that it would be -- given by the guidance that they had given us on the plan to reduce stocks progressively through the middle of 2015.

Okay. Thank you.

Just my follow-up would be -- your European sales, overall, were down about 6% year on year in Q2. Does the revised guidance embed that stays down year on year in Q3 as well as Q4? Or do you think you will be at a flatter run rate exiting this year?

I don't have the detail in front of me, but I would expect it to be pretty flat. The Elektron numbers, which might be down on the North American flare business, where, as I say, has still prospect of orders coming in that would change that. But at the moment, it looks like they will be down. So the European side, I think shouldn't be any worse than flat, but it's not much likely to be better than that, either, I think.

Okay. Thank you.

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

A couple questions here.

On CNG -- if you look at the CapEx that you've authorized for this year, historically, we've talked in terms of what your total revenue capacity would be. Can you give us a sense of, after these investments, what the revenue capacity would be? And how that would break up between larger CNG tanks and the portable tanks?

Yes. The AF capacity increases that we are putting in would allow us a link to liner capacity. We really have enough (inaudible) capacity with the acquisition of Dynetek. So that capacity comes on stream in two phases. The first phase, which has just come on stream, is worth about $7 million of revenue per annum. On the second phase, which comes in at the start of next year, is an incremental, roughly $10 million of revenue on [AAF].

The expenditure that we have announced on the portable cylinders, the SCBA cylinders, all about $7.5 million -- that is an across-the-board investment in all parts of the process. That will generate incremental sales potential of, certainly, north of $10 million. Not quite sure of the precise figure, but certainly, north of $10 million. And that is an investment in across-the-board on liners, on wrapping, heat treatment, and all the rest of it.

Okay. And just a follow-up -- as far as Elektron margins are concerned and the auto catalyst business. I understand that there's a margin impact because of mix because they're high-value products, and also some impact from utilization. But I wanted to get a sense -- is any of the margin impact due to pricing, or has that largely been stable?

Pricing is pretty stable. We've thrown the odd incentive in there on quantity discounts. But I'm not conscious of any price reductions as such. The margins on product remain at the target level. So essentially, all we need is for volumes to come back, and that will drive the profitability up quite quickly.

In essence, what we have is a relatively high fixed cost base in the chemical business and high margins on the product. So when we lose volume, it hurts; but it can come back quite quickly with the volume returning.

That's great. Thank you.

Your next question comes from the line of Anthony Raab with Perimeter Capital.

I was hoping you could help us understand, or help us size the opportunity for revenue in the GTM joint venture?

Well, the GTM business -- I would say, it's a JV, and we are going to equity account for our share of the profits. So the actual revenues that it makes, we will not be consolidating. We will be reporting the revenues on the cylinders that we sell into the business -- indeed, just as we do today. So the added value they add on -- the bulk of the cost of the modules is in the cylinders; but they do, obviously, have added value and added profitability. So in addition to making the full profit on the cylinders, we will take our 49% share of the added value that they generate, which is not insignificant.

We do think it's well worthwhile and will give a good payback, but it also, of course, ties in a major customer for our cylinders. The revenue potential for the GTM business in terms of the modules that it sells -- I think we are looking at several tens of millions of dollars. I could quite easily see that getting towards a $30 million business in 2014.

That's helpful. Thank you.

So what do think the return is on that investment? (multiple speakers)

Well, it to some extent depends on the mix of sales, and to whether it's outright purchase or leasing. There are customers in this business that really want to lease their facilities. On the accounting for the leased product, it's going to be quite different.

The majority of the business that we are seeing at the moment -- the majority of the orders that we are taking -- are for outright sale, so the return on those will be relatively immediate. And I think that we will make a very good return on our equity investment. I would talk that the payback on that is substantially less than two years.

Thank you. And maybe one more related to that.

What's the timing? When do you think that JV will see its first sales?

Well, it has made some sales already. We did hint that this JV early in the year without naming the partner. It's really just now that we've decided to go public with the partnership. But we have been working with them and generating order groups here for the last several months.

So I can say that in July, for example, I know that they have shipped eight modules containing our cylinders. They have built up quite a significant order group, such that we hope to see some quite significant sales of modules in the second half of this year. The only issue really being one of ramping up the production to make sure that they can satisfy the customer demand because we are taking the business to a different scale to anything that's been out before, even though our partner has been in this business since 2007.

Thank you. And then on the magnesium front -- I think you said it might be a while until we see any revenue? But could you help quantify that or put a finer point on that?

Well, what we said previously is that with the lead time on getting the material built into a seat design, that realistically it's unlikely that we will sell more than prototype material during 2014. So I think it's more likely to be the middle of 2015 before we might see some of the first new designs coming to the market with the magnesium components built into it. Then you could expect a progressive increase after that, depending what penetration that we make on replacing aluminum.

But we've always said right from the start that we believe that this market has the potential to generate at least an incremental $20 million of revenue to us once it has reached a relative level of maturity. And we'll start that process, I would think, round about the middle of 2015, depending on the discussions that we have with the seat manufacturers, including commercial negotiations between now and that point.

Thank you very much.

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

First question is just on the European automotive market. The production momentum there looks like it's getting a little, I would say, less bad. So is your situation, your outlook on the lack of restocking, Brian, more or less related to within your own competitive situation?

It's always difficult for us to analyze that one precisely. We were ascribing the bulk of the issue to the market; and yes, it is, I think, getting less bad, but it's getting less bad slower than people had expected it to. On general course -- quarter three, in absolute terms, is the lowest production quarter just because of the normal seasonality. So it could be that we see some restocking in the fourth quarter, but we don't feel confident enough to include that in our forecast. So we are assuming that, that's been pushed back now till 2014.

Okay. And can you give us a sense of what the biggest portion of your reduction in full-year guidance -- I know you mentioned the moving pieces -- but is it 65% Europe, 35% US defense? Just so we can have an idea of really where you made the changes?

Okay, I would -- top of the head, and this is top of the head -- I would say that the military is worth $2 million of that $10 million delta that we talked about earlier on. So the majority of it is Europe. And the majority of it within that is the Elektron business and the automotive sector, because the automotive sector, we had assumed a pickup in demand and a restocking effect, and we are now assuming that neither of those happens. But we also have a decline in the European Cylinder outlook versus where we were three months ago. I think that's probably worth about $1 million, as well.

Okay. I appreciate that color.

And on some of your longer-term new products, such as your Chemcat and your magnesium heart stents -- anything that you could tell us there as far as your expectations for those two products?

Just that they are going the way that we expected they would, and there's nothing really to report at the moment. As you know, these are long-term projects. The gestation periods are very long. The chemical catalysis in particular -- there's still a huge amount of work going on with prospective customers on supply, and then with prototype material for them to test and build into pilots' operations. And we are still in commercial discussions with a couple of those customers over quite substantive long-term contracts.

Now, I still hope that there will be something to say more on that before the end of this year, but right at the moment, there isn't any progress to report. But you shouldn't get worried about that. There's still a lot of activity under the surface.

Thank you very much.

Your next question is a followup from the line of Luke Folta with Jefferies.

So, Ford reported that they are going to start using alternative gas cylinders in some of their F150 line, and I imagine some other vehicles as well; and I'm sure some of the other manufacturers are doing the same. Can you give us a sense of what Luxfer's participation might look like in that segment of the vehicle market over time?

Well, we certainly have or are developing cylinders lines that would be capable of being used in such vehicles. Strategically, supplying into the volume automotive sector is not a priority because, in the long term, the ability to generate margins is really quite tough. So in the automotive sector, we prefer to deal with the converters or the lower-volume manufacturers such as the bus manufacturers.

But we will have products available, and we will be, certainly, having commercial discussions with people like Ford over the 150 over our cylinders. But at the end of the day, we don't sell cheap and [cheerful] cylinders, and the automotive industry will have to meet our price to pay back all the investment that we put into this area. So I'm not holding out a great deal of prospect that, that will be a major revenue generator for us. But we will certainly be taking a good look at it, and we will have products available as long as people are willing to pay the premium for the sort of product that we can sell them.

Okay. And then just one last one, regarding the new joint venture on the bulk gas side.

Did you disclose -- and I'm sorry if I missed it -- your percentage ownership in that joint venture? And also (multiple speakers) -- you did?

It's 49%.

49%, okay.

And then, can you talk about, again, how the accounting works? So when you -- so are you going to be selling cylinders to the JV, and that revenue should show up in Luxfer's P&L? And then when they make a profit on the unit, some of that profit gets booked as equity income? Is that how it works?

Absolutely. This is Andy.

You are absolutely right. We will just carry on recognizing our cylinder sales to the JV, but we will recognize the additional profit almost as additional margin from there -- from our 49% share of their profits. We also, if they lease cylinders or require additional funding, would recognize an additional income relating to that where we have helped fund that. And that's what this additional up to $10 million additional funding that we've put in place for supply chain funding and leasing. And that would -- if it was leasing, it would come through our interest line; and if other funding, that comes through the operating line.

So essentially, it will end up boosting the margin on the AF cylinder sales, if it's an outright sale.

Okay. And for the outright sales, how should we think about margins in that business? It that going to be something similar to the Gas Cylinders business, or --?

I think that the added value that they put in -- there's a ballpark. You probably want to work on them trying to generate something like 20% margin on their sales. But the added value is obviously limited. The quantity of the cylinders that go into these -- the value, the bulk of the value of the product is in the cylinders. The added value is rather less than the value of the cylinders it was in.

So you are saying 20% of their value-added revenue in that situation?

Yes.

Got it. Thanks a lot, guys.

Your next question comes from the line of [Neil Morgan] with Marathon.

A couple of quick questions, both on strategically important areas.

Just following up on the magnesium in planes and the news that we've got through, which is good -- a couple questions there. Firstly, has there been any reaction from the seat manufacturers? Secondly, do you get any visibility over other competitors who passed the lab tests which are now seen as satisfactory? Or would you not know if anyone who's looking to make a similar alloy would have something which has passed those lab tests?

Okay. First of all, the meeting that I referred to, the International Materials Fire Testing Group -- alongside the minutes, which are on the website, there's also a list of the attendees at that two-day session that was held here in Manchester. And it runs to 94 people, so it was a pretty extensive industry review body.

Now, I don't recognize all of the names or the companies that were there; but certainly, there were, obviously from the names listed, there were 18 people there from the airframe manufacturers. There were eight from seating manufacturers, four from airlines, and eight from various civil authorities around the world. Sit it's not just the FAA but the CEAA was there, along with Transport Canada and Singapore Air Authority as well. So it was a very wide body.

And as far as the seating people are concerned, it's our belief that they have been working for some time in the full expectation that this result would take place. Otherwise, we could never really explain why they were willing to do the work and take prototype equipment materials from us over the last 10 or 12 months in preparation. So I'm pretty happy that this will be an accelerator boost to our work with them, to develop the ultra lightweight seating designs.

Having said that, we still have to go through our commercial negotiations with them. We haven't actually got to the point where we've committed to them what price we are prepared to supply large volumes of material at. We've just been supplying prototypes to people to date. So there's a lot of work still to do commercially, as well as them to complete their design work. But we do think that this is now very widely known and very widely anticipated.

Okay. Excellent.

In terms of all the competitors -- the tests have been done using essentially our aerospace alloys on the one hand; generally available commercial alloys on the other. And so at the moment, our alloys pass the test, and the generally commercially available alloys do not. Now, there are other alloys out there that might pass the flame test -- a calcium-based alloy might pass the flame test. However, my advice is that it's unlikely to pass the corrosion requirements or the crash requirements. It doesn't have the aerospace certification that our alloys already have. So at the moment, there's no visibility of a direct competitor for that field.

Which is not to say there might not be one at one day, but we have no visibility of one at the moment. So at the very least, we have a significant head start.

And just one follow-up, which is in the -- you mentioned the Chemcat products.

It's great to hear that lots of work is still going on. You are still in discussion with companies about substantial long-term contracts. So taking that, is there still a delta between H113 performance and H112? Because I know in Q1 '12, because the sales of these products, when you don't have a long-term contract, are particularly lumpy. I think you had quite some decent lumpiness in the comparison period in '12, but I don't know if you have in '13, and so if that's been a delta?

Certainly, at one stage we default for a net increase in sales, '13 over '12; and we are not now expecting that, so it's not a major element of the delta that we talked about. But certainly, as you say, it is still lumpy. And some lumps that we might have thought would have fallen into '13 now look like they'll fall into '14 instead. But it's not a major contributor.

Okay. Thanks very much.

(Operator Instructions)

And our next question comes from the line of Julian Mitchell with Credit Suisse.

I just wanted to double check -- let's say, 12 months from now, what the annual revenue run rate, in terms of capacity is in AF after the second phase of CapEx comes on stream?

I would suggest that it's somewhere of $70 million or thereabouts. We are seeking to deliver at least $50 million this year, and we only have a part-year impact of Phase 1 of that additional capacity. So I think that it's somewhere north of $70 million -- somewhere between $70 million and $80 million a year in terms of our capacity, based on the current mix of sales and current prices.

Got it. Thanks.

And then lastly, you talked about, obviously, the weakness in European and some US defense business. How does that change your outlook on restructuring spend? Are you planning to book many more restructuring charges from this point?

No. We're obviously -- in light of the financial results, we are making efforts to trim costs, but there's no major surgery required. The situation that we are looking at we believe is a temporary one; and while we may have some small bits and pieces, there are no majoring restructurings that we are anticipating would be required. Essentially, we are just suffering some weakness in some markets, and we need volumes to return, to get back on an upward trend across the board. We have no reason, as we sit here, to believe that won't happen.

So most of the businesses have a lot of cost trimmed out of them over the years, so there isn't a great deal of fat to go out anyway. But we have no perception that we need to take a big slice to costs, so I don't anticipate much more in the way of restructuring costs this year.

Great. Thank you.

At this time, we have no further questions, and I'd like to turn the floor back over to Management for any closing remarks.

Okay. Well, thank you very much, ladies and gentlemen.

I know the results are a little bit disappointing, but please stay focused on the long-term prospect for the business, which we still believe is very positive, and we will speak to you again in three months' time. Goodbye.

Thank you. A recording of this conference call will be available in about two hours. For information about how to access this recording, please visit the Luxfer website at www.Luxfer.com. Thank you for participating in Luxfer's second-quarter call. You may now disconnect.