Luxfer Holdings PLC (LXFR) 2015 Q4 法說會逐字稿

Welcome to the Luxfer Group fourth-quarter conference call. We will first hear from Luxfer Chief Executive Brian Purves, who will provide an overview, followed by Group Financial Director Andy Beaden, who will review the financial performance for the quarter and year. Brian will then return to sum up and offer an outlook.

After that, Brian and Andy will be glad to take your questions. We request that you initially ask only one question. After you've heard the answer, we will give you the opportunity for a follow-up question. If you would like to ask additional questions, our operator will be glad to place you back in line. Thank you for your cooperation.

We will now turn the call over to Brian Purves.

Good morning, ladies and gentlemen. Welcome to the Luxfer conference call on the fourth quarter 2015 and full-year 2015. Turning to slide 4, as previously forecast, the fourth quarter was consistent with the earlier quarters of the year with little in the way of buoyancy, particularly in the top line.

We experienced continued weak demand for automotive catalyst products, and this was only partly offset by the first sales of our new SoluMag product. Overall, however, our cost-cutting actions meant that although down on last year, profitability was slightly ahead of forecast.

Our German operation continued to lose money during the quarter, but was closed on schedule at the end of the year. The important North American SCBA sector remains strong, and the Luxfer Magtech acquisition continued to perform well, with $8 million of sales in the quarter.

Adjusted fully diluted EPS of $0.27 was between $0.01 and $0.02 above consensus, although $0.04 below quarter four last year. And quarter four was again very good for cash flow.

Turn to slide 5. The North American market for self-contained breathing air kits is now strong again. We completed the rationalization of our alternative fuel business and the North American part of the alternative fuel business was profitable in the quarter.

Since our last conference call, sterling has weakened. Overall, this is good news for us, as it has improved the euro exchange rate. And while this is still worse than two years ago, it is no longer the potential adverse in 2016 that four months ago it looked like it could be.

Sales of high-performance magnesium alloys continue to be lower than last year, with both military and civilian helicopter build or refurbishment rates having been cut back. The situation, however, does appear to have bottomed out, as stocks get back into balance.

Using similar technology to the medical alloy, we have developed an absorbable alloy for the manufacture of down-well tools for the oil and gas industry. The advantage over traditional technology is cost-saving. The alloy received its first commercial sales in quarter four, and we have already received repeat orders.

Turn to slide 6. Over the year, sales revenue is down, but a very large element of this is the movement in exchange rates, with the US dollar, euro, and sterling having shifted quite a bit over the last two years, reducing US dollar revenues by $25 million.

The first full year of Luxfer Magtech added $15 million. But at an overall $25 million for the year, our alternative fuel revenues were down $12 million on prior year. The lower revenue, especially the lower aerospace alloys and catalyst sales, could easily have driven profit down further, but cost-saving actions meant that the EBITDA result is flat on prior year when adjusted for exchange rate movements. Cash flow was very much stronger than in 2014.

On slide 7, the cost savings mentioned previously included some progressive benefit of our alternative fuel rationalization on the North American business, but also other overhead reductions, particularly in the cylinders and chemicals businesses. As we predicted, the North American SCBA sector bounced back strongly from the problems of 2014, being up by some 20% on prior year, even though not all manufacturers received their new approvals.

The Luxfer Magtech acquisition completed mid-2014 has performed to expectations and the business is now working on several exciting growth opportunities, including geographic expansion. We completed our alternative fuel rationalization program on time and to budget. And before exchange rate movements, our profitability is very similar to prior year.

Turning to slide 8, our program to rationalize our alternative fuel facilities was completed as planned at the end of 2015. Poor though the market was around the end of 2014, it deteriorated further during the year as the oil price fell. We remain convinced that our decision to downsize our alternative fuel exposure was the right action at the right time.

In light of the continuing poor outlook for some sections of the market, such as bulk gas containment, we have taken quite a hefty impairment charge against our alternative fuel assets. This does not mean that we have given up on getting value for them at some point. The overall cash cost of the rationalization, mainly for severance payments, is close to the forecast given earlier this year.

Our remaining alternative fuel business is focused on one dedicated plant in Calgary producing the Type 3 metal-lined cylinders, part of our Riverside facility producing Type 4 polymer-lined cylinders. European bus systems are being assembled at our Nottingham aluminum plant, and our GTM JV has been refocused onto smaller towable gas transport modules and especially on hydrogen transport modules and fuel cells.

I'm pleased to confirm that the restructured alternative fuel business is profitable as we enter 2016. The financial return from the sector is likely to remain below what we would want until the price of oil recovers, but it is no longer a drain on the Group.

Slide 9. Following consultation, we agreed with the trustees of our main UK defined benefit plan that the plan would close to future accrual from this coming April. In future, we will also use CPI, the UK government's preferred measure of inflation, to inflate pensions and payment. CPI is typically around 0.75% lower than the now discredited RPI.

These changes have a material beneficial impact on the calculation of the actuarial deficit, which from the trustees' point of view makes the position of the plan more secure. The $18 million benefit is shown in the quarter for a result and reduces the long-term deficit that we would have to finance by the same amount.

Slide 10. While we bought just under $2 million worth of shares in quarter two, due to inside information being around, we made no further purchases in quarter three or quarter four. Since year-end, however, we have been back in the market and have purchased a further $6 million with of shares.

We are now in the process of pursuing Molycorp Canada in the UK Intellectual Property Court over infringement of our G4 process patent. Unfortunately, as with most court processes, we are unlikely to see quick resolution.

On slide 11, the now redundant Redditch site, once home to BA Tubes Ltd., which we discovered after we acquired it in 1996 was contaminated, has been a perennial item on our list of environmental issues. After extended negotiations, we have now sold the property to a specialist buyer who will remediate the land and sell it on for development. The consideration of $3 million now received is approximately $2 million over book value and we have recorded the sale post-balance sheet event.

Turning to the revenue slides on slide 12, stripping out last year's remaining surcharge and also exchange rate movements and the Luxfer Magtech acquisition, underlying sales are down in the quarter by 11.6%. The main issue in quarter four, as in quarter three, was a drop in sales of automotive catalyst material.

While some of this can be attributed to the market, the slowdown in China, and the problems of Volkswagen Group, we have recognized that we have lost market share. And we are now taking steps to recover that, including working on next-generation product.

On slide 13 in cylinders, after adjusting for exchange rate movements, the cylinder business was 8.5% down on prior year. By the fourth quarter of 2014, the North American SCBA market had partly recovered. So the main difference is a shortfall in our alternative fuel revenues.

Sales of medical cylinders, particularly in Europe, however, were also lower. And Superform had lower tooling sales than at this time last year when they were unusually high.

Slide 14 and our strategic growth projects. On magnesium alloys for civil aircraft, most of our effort is now being directed towards expanding our capabilities to provide the alloy in whatever form the industry needs to make switching to our material both easy and cost-effective. The so-called buy-to-fly ratio has become increasingly important as fuel costs for airlines have fallen.

We were delighted last week to be able for the first time to name our biotechnology partner for the bioabsorbable alloy. The German headquartered BIOTRONIK is one of the world's leading manufacturers of cardio and endovascular implants. We very much hope that their agreement that we can name them is a sign that they are getting close to product launch of this important product for us.

On medical oxygen delivery systems, modifications to our innovative in-house system, now branded AOS, and incorporating our SmartFlow regulator and designed for frail category home oxygen therapy patients have been completed and the device is again undergoing testing. We anticipate AOS, as it is now called, being on sale in the second half of this year.

While our major focus remains on high-pressure oxygen cylinders, we have noted growth in sales of portable oxygen concentrators, or POCs. These devices are more expensive than cylinders and, requiring batteries, heavier. But they do not require refilling.

Accordingly, we were pleased to reach agreement with Precision Medical, a Pennsylvania-based leading medical equipment supplier to manufacture a Luxfer-branded POC for sale in several European markets. The POC will be sold alongside our cylinders and AOS package in the main to the same customers.

Alternative fuel. Although the CMG market is depressed, it is important that we maintain a product advantage to preserve our smaller scale business. We have been working on a next generation of Type 4 cylinder, which has a unique interface between the liner and the boss and is much lighter than even our own current range. This product is now available, but will be formally launched in May.

Although the CMG market remains problematic, the use of hydrogen is now growing rapidly. I hope some of you spotted that several ZeroSet fuel-cell pods manufactured by our Luxfer GTM joint venture provided power for the fan village at the Super Bowl last month.

And now, Andy Beaden will take you through some of the detail on the quarter-three slides.

Thank you, Brian, and welcome, everyone, to the call. Brian, [per] the divisional sales analysis and my first slide, slide 16, shows how that consolidates into the Group revenue changes for Q4 2015 and full year.

Total revenue for Q4 2015 was $107.4 million, with no separate row of chemical surcharge now required, and this compares to net revenue of $123.1 million for Q4 2014. From the slide, you can see that FX translation differences reduce net revenue in the quarter by $3.8 million.

Other underlying revenue was down $11.9 million or 10%, as Brian's slide showed. And this was a result of lower revenues in both divisions.

For the full year, FX translation differences reduced revenue by $24.6 million. Surcharge changes accounted for a $2.2 million reduction. Luxfer Magtech added $15.1 million and other revenues were down $17.5 million, the majority of this reduction being Q4 2015. After Q3, we had warned Q4 would also be difficult. Though since then, order books have now picked up for Q1 2016 in zirconium and alternative fuels.

Slide 17 shows the trend in sales for Q4 2015 by geographic region. The percentage improvements in North American sales to 56% from 51% represent that region holding up better, with stronger self-contained breathing apparatus sales, improving AF, and the impact of FX on non-US markets. The UK was also weaker, with lower UK autocat sales, with the additional industrial catalyst sales being in North America.

Turning to the trailing profit and adjusted EBITDA results on slide 18, for Q4 2015, Group trailing profit was $9.5 million, $1.2 million below Q4 2014. Improvements in the self-contained breathing apparatus composite cylinder market and the initial sales of SoluMag were offset by lower sales of other magnesium and zirconium products.

FX translation differences improved trading profit by 0.2. However, FX transaction had an adverse effect, reducing trading profit by 0.3. Elektron division trading profits in Q4 2015 was $7 million, $2.8 million lower compared to Q4 2014.

FX differences had an adverse impact of 0.2; lower sales of our auto catalysts products impacted profits in the zirconium business. And lower sales in the magnesium recycling and powders business also adversely affected the results. The impacts of lower sales was partly offset, though, by fixed cost-saving initiatives across the division.

Adjusted EBITDA for Elektron was $10 million compared to Q4 2014 of $12.6 million. The EBITDA margin for the Elektron division was 20%, down on Q4 2014 of 21.6%.

Gas cylinders division trading profit was $2.5 million, $1.6 million higher compared to Q4 2014. FX benefited the division by 0.1. Overall sales volume reductions did reduce profit by $2.1 million. However, this was offset by the fact that we did not have a trading charge for AF asset impairment of $2 million repeated, unlike Q4 2014. The impairments in this quarter being part of the restructuring activities reported below trading profit. The net improvement was therefore a result of cost savings in both raw materials and fixed costs.

Gas cylinders adjusted EBITDA was $4.6 million, [up of course] $4.6 million, up on $3.2 million for Q4 2014. The EBITDA margin was up at 8% compared to 4.9%. For Q4 2015, adjusted EBITDA was therefore $14.6 million for the Group compared to $15.8 million for Q4 2014. The FX impact on adjusted EBITDA was a negative $0.2 million.

The Group's adjusted EBITDA margin was up at 13.6% compared to 12.8% for Q4 2014. For the full year 2015, adjusted EBITDA was $62.2 million, against $64.8 million for the full-year 2014. The FX impact is estimated at $3.8 million adverse. So at constant exchange rates, adjusted EBITDA was actually up $1.2 million or just below 2%.

To help explain the key trading variances for 2015, I have also added in a series of waterfall slides to the reporting pack: one for the Group, and one for each division.

Turning to the Group slide, you can see the FX impact was a negative $2.8 million. The full-year benefit of 2014 acquisitions are at $2.4 million. The other major variances are volume and sales mix changes, reducing profit by $13.5 million, with this partly mitigated by cost savings. This includes materials and other direct cost savings of $4.6 million and indirect cost savings of $6.9 million.

The next slide is for the Elektron division; the same breakdown of movements. The key points being the volume mix variance is a negative $ 9.8 million with cost savings of $7.3 million. The final waterfall slide is for gas cylinders. Here, the volume mix variance is negative $3.7 million, but the total cost savings are $4.5 million. And better sales pricing of $1.2 million also helped over the year.

Turning to the full income statement on slide 22, we have covered the revenue and trading profit already, so I'll not repeat our analysis on those items. Gross margin was 21.7% versus 22.8% for Q4 2014. The fall in the margin percentage was a result of the weaker sales in Elektron of a negative mix affect. So at a Group level, a higher proportion of sales were from lower margin product areas.

Distribution costs at $1.8 million for Q4 2015 were the same as last year. Admin expenses are much lower in the quarter, down to $11.4 million from the $15.6 million, with several million dollars of cost savings and also some benefit on translation differences.

In the quarter, we had the $18 million exceptional credit in relation to the closure of the main UK defined benefit scheme and the switching to using CPI for inflation increases and benefits. Also in Q4 2015, we charged $11.2 million for restructuring and similar expenses. Nearly all of this related to the gas cylinders division and was mainly in relation to a final impairment review following the closure Germany AF manufacturing operations.

This review included the carrying value of assets in relation to SUB161, which have been a customer of Luxfer Germany. The vast majority of the Q4 2015 charge is non-cash.

If higher amounts are ultimately realized for the assets, then the difference would be written back at a later date. The charge reflects the assumption the AF market for large C&D module systems will remain very weak, given the low oil price. But also weak end markets, such as SUB161, Australia's mining market.

Operating profit, which is after restructuring and other exceptional items, was therefore $16.3 million for Q4 2015 versus $8.2 million for Q4 2014. Below operating profit, in Q4, we charged $1.9 million to acquisition and disposal costs. $1.8 million of this related to activity which did not complete with a balance in relation to SUB161.

I have broken out the elements of the IFRS finance charges, being as follows. Net interest of $1.8 million, $0.2 million higher than last year. The notional IAS 19 retirement benefit finance charge, which is $0.7 million, which is the same as last year, plus $0.1 million for the notional interest charge on deferred acquisition consideration.

In the appendices to this presentation, we disclose our non-GAAP reconciliations for adjusted EBITDA, adjusted net income, and EPS. And you can see we strip out of the figures the restructuring costs, the acquisition disposable items, and the IAS 19 financing charges.

The headline effective tax rate was 37%. This is distorted by the restructuring and other exceptional items. As it was last year, which led to a rate of 4%. It is better to look at the underlying tax rate for the year implied by adjusted net income. This is 22.6% for 2015 versus 23.7% for 2014.

Statutory net income for Q4 2015 was $7.4 million compared to $11.8 million for Q4 2014. The adjusted net income was the same, at $7.4 million, being adjusted for the exceptional items. The Q4 2014 adjusted net income was $8.4 million. The fully diluted EPS -- adjusted EPS was therefore $0.27 for Q4 2015, which is in line with what we had expected after reporting Q3. Q4 2014 was higher, at $0.31.

The next slide, number 23, shows the consolidated balance sheet. It reconciles the key changes from December 2014 to December 2015. Overall, invested capital in the operating businesses was $264.4 million net of the pension deficits of $58.9 million as at December 31, 2015. The deficit is down considerably from the opening position of $90 million as a result of the UK closure and switch to CPI indexation and the deficit repayments.

Net debt, debt minus cash, was $94.7 million, down from $106.8 million at year-end 2014, thanks to a stronger cash flow. FX differences, primarily due to the stronger US dollar, reduced net assets by $8.6 million. And the 2015 rationalization activity reduced assets further by $19.7 million, though the pension changes increased net assets by $14.3 million.

Turn to cash flow on slide 24. So another good cash quarter. Our operating cash flows in Q4 2015 were a positive $15.2 million compared to Q4 2014's positive $16 million. Working capital was an inflow in Q4 2015 of $6.1 million. This means we generated $52.8 million of operating cash net of taxation, up on the $23 million for 2014.

Investment cash flows for Q4 2015 were a net spend of $7.4 million. We invested $7.3 million in Q4 2014. The 2015 number being CapEx and property, plant, and equipment at $6.6 million, intangible expenditure of $0.9 million, and is net of interest income received from JVs of $0.1 million.

Cash generated before financing for Q4 was therefore $7.8 million, bringing the total for 2015 to a total of $31.6 million. After finance payments and movements, our net cash flow to Q4 was an outflow of $2.4 million after repaying $5.9 million of revolver borrowings. Just a note on Q1 2016: there will be approximately $10 million of cash outflows which are for exceptionals and share buybacks in Q1 2016.

So in summary, we made progress on profitability in gas cylinders, but fell back in Elektron. Trading profit and adjusted EBITDA and EPS at constant FX rates were all up on 2014. We realized net operational cost savings of approximately $7 million and saw the benefits of lower raw material costs, too.

Cash flow performance was very good, with a high cash conversion rate. This has led us able to increase the cash dividend by 25% for 2016 and also buy back shares of 1.9 million in 2015 and a further 6 million in Q1 2016. The now completed AF restructuring should also add $4 million in credit profits in 2016.

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

Thank you, Andy. Summarizing quarter four, then, the profitably of our cylinder business in quarter four was improved, with North American SCBA back to growth and our rationalization program in the alternative fuel business stream in its final stages.

The Elektron division had a couple of key sectors below par, with sales of aerospace alloys down for the reasons given earlier. And our autocat sales also down. Although our revenue was down in the quarter, the cost reductions that we have implemented meant the profit impact was small. Our adjusted Q4 EPS was above consensus and our cash flow performance was again good.

Slide 27. Gas cylinders' major activities during the year were to service the expected increase in the North American SCBA market and rationalize the alternative fuel business. And both of these they did well.

We did have some issues with our 4,000-ton press at the Graham aluminum plant that restricted capacity, especially for US medical cylinders. The press was temporarily repaired over the Christmas shutdown and is performing all right at the moment. A more permanent solution will be implemented in the summer shutdown.

It was a difficult year in some Elektron sectors, but overall, the Group result held up. We achieved most of our key objectives for the year and achieved a good step forward in managing our pension deficit.

Turning to the outlook, we expect sales of aerospace alloys and autocat products to recover somewhat in 2016, although remaining below 2014 levels. Elektron is expected to get a boost from sales of the new SoluMag material for the oil and gas industry. And we are very encouraged by the strong order intake that we are getting for zirconium-based industrial catalyst materials -- better than we have ever seen before.

The North American side of the cylinder business is now performing well, and we believe that will continue with further underlying growth in SCBA, partly offset by our customers having worked through the bulk of the backlog of delayed 2014 business. We expect our smaller alternative fuel business to be profitable. The European medical market is expected to be stronger, and we will soon have some interesting new added-value products to take to that market.

On slide 29, we cannot see the global economic background changing much in 2016, but our cost-cutting actions, lower input costs and eased exchange rate situation, and our new product launches mean that we are confident that both divisions can increase their profitability in 2016.

Although some observers are concerned about the forthcoming EU referendum in the UK, it is our view that as with the 2014 Scottish referendum, porters will take cold feet about such a major change and vote to stay. Even if the vote is for exit, however, we are confident that the business would not be materially affected.

It is very early in the year, but at this stage, we are happy to indicate a 5% to 10% improvement in profitability. Our cash flow performance is much improved, and this has given us the confidence to increase our dividend and recommence our share buyback program.

Thank you, and we will now take questions.

(Operator Instructions) Julian Mitchell, Credit Suisse.

This is Brian Gibbons in for Julian this morning. Raw materials is a benefit of $5 million in 2015. I was just wondering if you could talk about how that looks for 2016. I know you are saying that it looks like a benefit again, but maybe break it down by segment. Do you see it weighted equally in both segments or does one stand out as a better benefit?

The bigger impact is certainly on the cylinders side of the business, where aluminum has been low for long enough now that we are starting to get the benefit. Obviously, our hedging policy means that as the aluminum price falls, we don't get the benefit right away. But it's been low for long enough now that we are starting to see that come through.

It's also the case that the delivery premium on aluminum fell quite dramatically during the course of 2015. And so there's an annualized benefit that we get from that in 2016 as well. Then the price of carbon fiber, which is heavily oil-derived, the price of carbon fiber has come down. We do under our contractual arrangements, we do pass through share of that benefit to our end customers. But nonetheless, there is a net benefit to us.

So it's primarily in the cylinder business. There are some benefits on Elektron. Where we buy Chinese magnesium, the price of Chinese magnesium has fallen below $2,000 a ton for the first time I can remember. US magnesium under the tariff barriers hasn't really fallen at all. So it's only where we buy and use Chinese-based magnesium that we are getting that benefit, but it is there nonetheless.

Great, thanks. And then I was wondering on -- you said your working capital gains have largely been realized. I was wondering what you are expecting for a cash conversion rate in 2016?

I don't expect to change much our working capital ratio from where we are at the moment. The -- so based on -- we are expecting a slight improvement in the overall demand 2016 to 2015 and would expect a slight outflow therefore in working capital.

There is probably still slightly too high levels of inventory in the Elektron division. But that's going to require a sort of longer-term project in terms of working on contractual terms and other things. So I think over a two-, three-year period, maybe two years, I still think there's $3 million to $5 million of longer-term working capital to get out of the system.

However, Q4 we did very well. So I think we got ahead of our program in the short term as reducing working capital, which is a program over several years. It's not just over 2015. So I'm probably ahead of the game at the moment the first few quarters of 2016.

Back end of 2016, I might be hoping to get a bit more out of inventory, another $2 million or $3 million out of it compared with [public] sales. So probably a net outflow if we see an improvement in the top line. Neutral if the top line is flat.

Great, that's helpful. Thank you.

(Operator Instructions) Garo Norian, Palisade Capital.

I wanted to see if you guys could discuss a little further the line in the release about being approached by two different, I guess, entities to acquire the Company. And neither reason resulting in an executable offer, etc. Just what kind of color can you provide around that?

Very little I'm afraid, Garo. It's obviously a very sensitive area covered by all sorts of rules. You can see that with the expense that we incurred, we did get quite far down the road with one of the two approaches. And of course, the background last year -- second half of last year to any sort of transaction was not terribly helpful, with plunging stock markets, tightening debt markets, and deteriorating economic outlook. So beyond that, I can't really say a great deal.

Okay. I guess one question that I was wondering if it could be -- would these portfolios from industrial businesses or financial sponsors? Or would it might not be this --?

I don't think I can say so really. We did get two approaches as it says. They were at slightly different times, although there was an overlap. But we did get much further down road with one than the other.

And we did give them due consideration. And certainly with one of the two, we thought at one stage that it might get to the point where we could come to the shareholders with something. But I'm afraid it didn't get there.

Got you. Just switching gears, on the auto catalysis side of things, is the competitor that you are suing still selling the product that you believe is infringing currently?

Yes, it is. This is public information, so obviously the people that are buying the product are aware of our view on the matter. And we might hope that they take note of that. However, the only certainty that we can have really is by winning a court case. And our objective, really, is to achieve a sort of cease-and-desist order to prevent them from importing the product into -- in the first instance into the UK and Europe.

So the information is public and we do hope that it influences our customers' buying patterns. But at the moment, they are still selling quite large quantities of the material. And as a consequence, our market share is much reduced from where it was.

We are not just relying on the court action to recover that market share. We doing other things as well, both commercially. But I think most importantly, working on new product developments. And really sort of jumping a generation in terms of the technology. Because that's obviously the best way to stay ahead of competition. And in particular, the Chinese competition, which tends to use intellectual property, which has been around for a little while, and they've been into absorb it.

The problem, of course, that we had with the G4 technology is that being a process patent, the information as to how to do it is out there in the patent. And the only way to protect it is to identify, fingerprint the process that they are using, which is what we've done, and then pursue them in the courts. But we are not relying solely on that to recover the market share.

Got you. And just lastly, on some of the areas that seem to be on the improvement side, I guess the industrial catalyst demand, what do you attribute the strength there to? And then also separately, on the SynerMag, what kind of impact do you expect in the first 12 to 24 months?

On the industrial catalyst side, you'll be aware that we've been working away at this market for many, many years now. And one particular customer we've entered into an agreement with, which has very much shortened the lead times for the product, we are actually building a stock for them that they can call on. And that seems to be paying dividends.

So whereas our sort of overall tonnage each year has sort of fluctuated between 100 and 200 tons, we've got orders now for 2016 for about 175 tons from this one customer. And that is the sort of breakthrough that we have been looking for.

Obviously, we have a lot more than one customer and we hope eventually to migrate more of them on to that level of scale. But the efforts that we've made to stimulate demand with this one customer -- after several years of working with them, I have to say -- do seem to be starting to pay off.

On the SynerMag side, obviously we are very encouraged by the fact that BIOTRONIK, who previously under our nondisclosure agreement wouldn't allow us to name them, the fact that they've changed their mind we believe indicates that they are getting quite close to market launch. But that's very much in their hands.

They did announce at a medical conference in October last year the sort of latest follow-up studies from the last clinical trial, which seemed quite satisfactory. And we would anticipate that at some point in the next few months, they will launch the product.

We obviously -- the main benefit to us is from royalty payments on their sales, and so there is a lag involved. So I don't anticipate that it will generate that much income for 2016. We should manage to start making sales of the material, but the main revenue stream comes from the royalties and that would follow on later. So it's more likely to start to impact in early 2017.

Great. Thanks very much.

(Operator Instructions) Arnaud Ajdler, Engine Capital.

I had a question as a follow-up of the earlier question of -- I think it was Palisade, regarding the $1.1 million of expenses you incurred dealing with the approach that you received from two potential buyers.

I was curious -- when you received these approaches, did you basically just answer to these approaches? Or you opened it up and effectively started a broader strategic review process, where you guys went and solicited potentially other offers? Or you just examined these two approaches that -- these two calls from -- these two inbound interest?

We don't have an intention to put the business up for sale. We have our own strategy to increase shareholder value organically, and that's our core program. However, if we are -- if we do receive an approach, then obviously we are duty bound to examine it properly.

We appointed financial advisors and that's what did. And had those approaches turned into an actual offer that our financial advisors felt they could recommend without us, you know, investigating other avenues, then we would've brought that to the shareholders. But that didn't arise because for various reasons, I really -- I think you would have to ask the approaching parties, but I am afraid I can't tell you who they are. It didn't get to that stage.

So the answer is we did explore the specific approaches rather than go to the market. And we were responding to those with financial advice in observance of our fiduciary duties.

And at the end, the reason why it didn't happen, would you say it was price? Where their price was too low compared to what your view is of the value of the Company? Or so there was a price difference between the buyer and seller? Or just it didn't even go to that point?

It didn't get to the point where they made a formal offer. So we didn't have valid consideration as a Board to make. We incurred a lot of expense -- actually $1.8 million between the two. And that was obviously responding to their request for information.

So we did open up our books with more with one part than the other, but we did open up our books and incurred quite a lot of expense responding to their inquiries, legal costs and financial advisory costs. But it never got to the point where they put an offer on the table that we could take financial advice on and consider taking to the shareholders.

Would that have been different had the economic environment in the second half of last year been different? Who knows? But certainly, the backdrop of funding stock markets, tightening debt markets, and a worsening economic outlook was not exactly auspicious to doing any M&A transaction in the second half of last year, I submit.

Right. So is that why you guys didn't open it up and did a full strategic process? Because you didn't think it was the right time to do it? Because it seems to me that when you guys are approached and you are actually going that route or exploring that, trying to bring in competition would have been the right thing to do. So I'm just trying to understand the thought process for not doing that.

As I said earlier, there was an overlap between the two approaches. So we did have a direct comparison between two interested parties. And while it never got to an offer position, they did obviously give an indicated value. Otherwise, we wouldn't have followed opening the books to them.

So we did have a degree of competition there. And we also took, as required under the UK takeover code, we also took independent financial advice. But the Board is not of the view that it would be best for the shareholders to go out and market the business to any third parties. We have our own views on how to generate the best return for shareholders, and that is following the strategy -- the strategic path that we have.

However, if along the way we receive an approach which offers the opportunity to the shareholders to generate shorter-term gains, we will give it due consideration. And that's what we did to these two.

And so at this point, these efforts are done? Or is it still ongoing or this is now over?

The two approaches are dead. If that weren't the case, we wouldn't have been able to go back out into the market and restart our buyback program (technical difficulty) unable to buy back any shares in the second half of last year because under -- we were under takeover code rules in the UK.

Okay. Well, first of all, thank you for disclosing this information. My own feedback, for what it's worth, is that, you know, given the approaches that you received, I would have -- as a shareholder, I would have been in favor of you guys opening that up to other potential parties. Because, you know, that could have led to an offer that could have made sense to shareholders.

And I would encourage other shareholders who are listening to potentially call in and express their views on that. But in any case, thank you for disclosing the information. Talk to you soon.

Jonathan Sacks, Stonehill Capital.

Thanks for answering all the questions. Just a few follow-ups. On the industrial catalysis, in the past, you've mentioned that you were working with a potential customer who I think might've had a North American facility, where you thought the end use was in a North American facility. Was this order from the customer with whom you have been talking for a long time?

It is for the customer that we've been talking with for a long time, but I don't think it's the same one that you are thinking of. This is a different application. And although the scale of the order is similar to what I talked about a couple of years ago it is a different customer, different application.

Which is just indicative of the fact that we do talk to six or seven different customers in this area and any of them are capable of generating this sort of volume. It's just getting the technology out into the market and starting to attract a fan base, if you like, and gradually building up repeat orders.

So the one I referred to two or three years ago is potentially still out there, as indeed are others. But this is a different one, but of a similar scale. It is mainly coming out of the North American plant, but it is going into a variety of different facilities.

And is that for a chemicals business or oil and gas or refining-related business? Just at a high level?

I don't believe this one is oil and gas. One of the applications that we do sell product into is for isomerization, and I think this is a general chemical plant application rather than petrochemical.

Okay, great. And then on SoluMag, I know it's early days still, but can you give us any sense of the potential revenues that that business might have if things go well?

I'd love it if we were launching it into a more buoyant oil and gas sector, in which case I would be quite bullish about the outlook. As it is, as you know, oil exploration is at a very low point at the moment.

We are generating quite a lot of interest with the product. And of course, we are coming from a zero base, so any sales is incremental to us. But ideally, what you would want is for new exploration activity to be going on.

I think what we are doing at the moment is selling into people who are still sort of extending existing wells or re-fracking existing wells. And the product we believe results in a cost-saving against the operating cost of the traditional technology. So we do think there is potential there for us to sell several million dollars' worth of the product, even this year, based on the indications of interest that we've seen. But the potential for it in the medium term could be much larger. But we'd really like to see a more resurgent exploration sector to get confident about it.

In a buoyant oil and gas sector, yes, I think this could be up there with some of the growth opportunities that we talked about at the IPO, where it could be a $20-million-a-year revenue business for us. But right at the moment, it's harder to see that. But we still think that we could get, I don't know, $3 million, $4 million, $5 million worth of business out of it this year.

That's great. And then just one quick question on the pension changes, which certainly had a very beneficial impact on the deficit. How does that impact your annual cash contributions?

It won't impact on the annual cash contributions. What it will do is shorten the duration of the remediation period. So we'll pay the same amount each year, but for fewer years.

So I think the last time that we agreed the remediation program with the trustees three years ago, that program went out to 2024. And with the reduced deficit and a similar level of remediation, it could be as early as 2022 now that you would get to a balance situation on the pension scheme.

That's what we are aiming for, really. Because once you get to that, you switch out of equities into so-called matching assets. And in theory then, there should be no further cash call on the Company unless there are further extensions to longevity, for example. So bringing it's in closer to the point where it no longer becomes a problem for the Company.

Great. Thank you very much.

At this time, there are no further questions. I'll now return the call to Brian Purves for any additional or closing remarks.

Yes, I think we are out of time. So thank you very much for some interesting questions, and we will speak to you again in three months' time. Thank you. Goodbye.

An encore recording of this conference call will be available in about two hours. Telephone numbers to access the recording will be available on the Luxfer Group website at www.luxfer.com. Thank you for joining us today. You may now disconnect.