Morgan Advanced Materials Regulatory News (MGAM)

FULL-YEAR RESULTS FOR THE YEAR ENDED 31st DECEMBER 2015

Results summary

* Applying 2015 exchange rates to 2015 and 2014 figures

** Constant currency adjusted for acquisition and disposals

~ Definitions of the financial measures can be found in the glossary

The Group has carried out a review of its strategy and today sets out its overall vision and direction and six execution priorities to position Morgan to deliver resilient financial performance and faster growth.

Financial highlights

· In very challenging markets, revenue on a like-for-like basis decreased by 0.8% compared to 2014.

· The full year book-to-bill ratio was 0.99 times, with the outstanding order book at the end of 2015 c.5% below that at the end of 2014.

· EBITA margin for the full-year was 12.0% (2014: 12.8%).

· Cash flow from operations was strong at £135.6 million (2014: £120.0 million).

· Net debt at the year end was £216.0 million (2014: £207.0 million). Net debt to EBITDA ratio at the year end was 1.6 times (2014: 1.4 times).

· The Group has booked a £22.1 million charge before tax in the income statement (2014: £51.9 million) in respect of a number of specific adjusting items, £21.6 million relates to non-cash items. Details of are provided in the Financial Review below. Due to the nature of these items they are excluded from the underlying operating profit figures.

· Proposed final dividend of 7.0 pence per share (2014: final 7.0 pence per share), which would result in a full-year dividend of 11.0 pence (2014: 10.9 pence), a 0.9% increase.

Regional Highlights

· In North America, as outlined in the November Trading update, the majority of businesses saw a decline in revenue in the second half of 2015 having achieved revenue growth in the first half. For the full year, revenue decreased by 2.3% on a like-for-like basis compared to 2014, maintaining mid-teen EBITA margins at reported rates of 14.0% (2014: 14.9%).

· The Europe region achieved like-for-like currency revenue growth of 1.7% compared to 2014 despite a weaker second half of the year. Full year reported European EBITA margins declined to 11.7% (2014: 12.2%).

· The Asia/Rest of World region continued to experience headwinds in trading with revenue down by 1.5% on a like-for-like basis. China remained the principal headwind, with revenue down 11.2% year-on-year. EBITA margin at reported rates reduced to 11.6% (2014: 12.8%).

Strategy and Organisational developments

Since September 2015 the Group has carried out a review of its strategy and today sets out the overall vision and direction for the Group, and the execution priorities.

The Group today has key strengths in Ceramic and Carbon materials science and associated technologies and products, in application engineering, in the ability to solve difficult problems for its customers, and has strong reputation, brand loyalty and customer relationships. These key strengths, together with the Group's skilled and engaged employees form a good foundation on which to build.

The long-term strategy is to focus on building three distinctive core capabilities: materials science, applications engineering and customer focus. The Group will apply these capabilities to a portfolio of scalable global businesses where technical expertise and differentiation is valued to solve challenging problems for its customers. Through this, the aim is to strengthen the Group to deliver resilient financial performance and faster growth.

The Group has set six key execution priorities:

1. Move to a global business structure.

The Group is changing its organisation structure, moving from the current regional model to a global business structure. The Group will be organised around two global divisions and six business units:

· Thermal Products division. Organised in two global business units:

o Thermal Ceramics

o Molten Metal Systems

· Carbon and Technical Ceramics division. Organised in three global business units:

o Electrical Carbon

o Seals and Bearings

o Technical Ceramics

· A single global business unit: Composites and Defence Systems.

This re-organisation will improve global coordination across the Group and will strengthen accountability within each global business unit. There will be a simplified approach to global customers and markets, increased efficiencies driven through best practice sharing, and better leverage of R&D across regions. There will be greater operational focus, including better capacity planning and management of the manufacturing footprint, better alignment of technology development priorities with customer needs and growth opportunities in global market segments. The Group will ensure that the key benefits the regional structure delivered will not be lost. The Asia/Rest of World region is an important growth driver for the Group and the investment in capability and capacity will continue and there is a dedicated senior resource in the structure to drive Asian growth. Where appropriate, resources will continue to be shared, for example in IT and key HR functions, within regions rather than diluted or replicated.

2. Improve technical leadership.

The Group plans to increase its R&D investment to grow its technical lead and accelerate new product development, reducing time to market. The Group has two successful centres of excellence today, Insulating Fibre, part of Thermal Ceramics, and Structural Ceramics, part of Technical Ceramics, and two more will be established, Brazing and Joining, in Technical Ceramics, and one for carbon science that will support Electrical Carbon and Seals and Bearings. These centres allow the Group to concentrate development efforts for these materials and capabilities. R&D investment was increased to 2.8% of sales in 2015 (2014: 2.3%) and the Group anticipates increasing this by around 1% of sales over the next three to five years funded by savings from improved operational execution. The Group will strengthen its stage gate development process and ensure it is applied consistently across the Group.

3. Improve operational execution.

The Group has a number of opportunities to improve operational execution - both in terms of efficiency and effectiveness. The operational opportunity varies by business unit and the Group will allocate capital and target specific improvements to efficiency and effectiveness on a business-by-business basis. For example, Thermal Ceramics will target efficiency improvements through a combination of global best practice implementation, application of lean manufacturing techniques and global sourcing of raw materials; Technical Ceramics will focus on improvements in quality, yield, scrap and delivery; and, Electrical Carbon on capacity utilisation and efficiency.

4. Drive sales effectiveness and market focus.

During 2016 the Group will focus on improving a number of aspects of its sales capabilities and process - focusing on the sales process and its efficiency, the management of key customer accounts, the management of distribution channels and deepening the understanding of end markets and their faster growing segments. The Group has a good relationship with its existing customers but there is more to be done to win new customers and take its solutions to new markets.

5. Increase investment in people management and development.

The Group will strengthen its leadership capability and deepen functional capabilities across the business, including in sales and engineering. Senior leaders will be benchmarked externally, new talent introduced and future leadership candidates identified from within the business. Performance management will be enhanced for the Group's top management and the structures and targets for incentive schemes will be reviewed. The Group will invest more in executive training and create clear career paths for its technologists and engineers. The intake of graduate trainees will be increased from 30 to 50 a year over the next four years.

6. Simplify the business.

Through the reorganisation of the business the Group will focus on running each business unit on a global basis. The intent is to grow each business to global scale and to exit those products and markets where that cannot be achieved.

The Group will continue to refine its strategy and approach during 2016 and, in particular, will build the implementation plans in greater detail as lessons are learnt from the initial work.

Commenting on the strategy review, results and outlook for Morgan Advanced Materials, Chief Executive Officer, Pete Raby said:

"Since joining the business in August, I have carried out a review of the Group's strategy and today set out the vision and six execution priorities to position Morgan to deliver resilient financial performance and faster growth. We have committed employees, good businesses in attractive markets and we have a number of opportunities to grow.

We will focus on the Group's core strengths, and on doing fewer things better in order to deliver resilient financial performance and faster growth.

Whilst 2015 has been a very challenging year for the business, with sharp slowdowns in a number of our markets, we have delivered a solid set of results. We are planning prudently for 2016 in a market where we take a cautious view of trading conditions, with a focus on increasing our efficiency and reinvesting in the business."

For further enquiries:

There will be an analyst and investor presentation at 09.45 (UK time) today at The Lincoln Centre, 18 Lincoln Inn Fields, London WC2A 3ED. A live video webcast and slide presentation of this event will be available on www.morganadvancedmaterials.com. We recommend you register at 09.30 (UK time).

www.morganadvancedmaterials.com

Morgan Advanced Materials plc Registered in England & Wales at Quadrant, 55-57 High Street, Windsor, Berkshire SL4 1LP UK Company No. 286773

Operating Review

* Definitions of the financial measures can be found in the glossary

Sales by market for Full-Year 2015

North America

Revenue for the North America region for the year was £368.4 million, representing an increase of 4.3% compared with £353.1 million in 2014. At constant currency the year-on-year decrease was 2.3%. Revenue in the second half of 2015 was 6.7% lower than the first half at constant currency.

EBITA for the region was £51.5 million (2014: £52.5 million) with the margin maintained in the mid-teen range at 14.0% (2014: 14.9%).

The North America business experienced a weak second half of 2015 across the majority of its businesses compared to the first half, resulting in a 2.3% decrease in constant currency revenue year-on-year. Thermal Ceramics for the year was marginally down on 2014 by 1.0% with the second half down 9.8% compared to the second half of 2014. The decline in large project orders coupled with reduction in orders in automotive, oil and gas and general industrial applications were the major reasons for this decline. The Technical Ceramics business continued to experience a mixed trading landscape with flat revenue half-on-half with some positive growth from consumer electronics offset by declines in other parts of the business. The Certech business, that supplies ceramic cores used in the manufacture of turbine blades, has continued to improve its operational yields in 2015, with EBITA margins improving, however yields and operational performance need to improve further in 2016 in order to achieve acceptable profit levels. Seals and Bearings was negatively impacted by oil and gas in the second half as well as a general slowdown in trading and a further reduction in body armour revenue to a very low level of business.

The order book in North America has declined each month through the second half of 2015 with the full year book-to-bill ratio at December 2015 at 0.98 times.

Europe

Revenue for the Europe region for the year was £305.7 million, representing a decrease of 6.1% compared to 2014. At constant currency and adjusting for the impact of acquisitions and exits, the increase was 1.7%.

EBITA for the region decreased to £35.8 million (2014: £39.8 million), with the full-year margin reduced to 11.7% (2014: 12.2%).

The Thermal Ceramics business achieved good organic revenue growth of 10.7% at constant currency compared to 2014, with large project orders from North America and the Middle East the main driver for this. The other businesses in Europe had a much more mixed performance, as the second half of 2015 saw declines in demand across many end markets. Revenue growth in Seals and Bearings was close to 2% for the full year but the second half was marginally weaker than the second half of 2014, reflecting the impact of oil and gas market declines. The Electrical Carbon business was down 3.5% year-on-year at constant currency reflecting softer general industrial demand. Technical Ceramics' revenue in the period fell 3.0% at constant currency, with end-market conditions generally soft, but particularly in the piezo ceramics product range that serves the aerospace, automotive, marine and medical markets. The Composites and Defence Systems (C&DS) business saw a further decline in second half revenue with this business continuing to operate in a difficult UK defence market whilst still looking to develop new business to increase its international and wider commercial exposure.

The order book in Europe has declined through the second half of 2015 with the full year book-to-bill ratio at December 2015 at 0.98 times.

Asia & Rest of the World (ROW)

Revenue for the Asia & Rest of the World region for the year was £237.7 million, representing a decrease of 2.1% at reported rates. On an organic and constant currency basis, revenue declined by 1.5%.

EBITA for the region was £27.5 million (2014: £31.2 million), a margin of 11.6% (2014: 12.8%).

Trading conditions in Asia/ROW have been mixed throughout the year. China revenue fell by 11.2% compared to 2014 on a constant currency basis. The Chinese domestic market has been weak through 2015 across the industrial markets served with large project orders particularly impacted. Indian revenue was down by 3.0%, whilst the first half of 2015 was encouraging, the second half saw general weakness across industrial markets. South East Asia, including Korea, continued to achieve revenue growth, up 13.3% year-on-year on a constant currency basis. Other parts of the region were mixed, the Middle East flat year-on-year, while the South American business continued to experience very weak economic conditions. The Molten Metal Systems, business with approximately 50% of its revenue in the region, continued to experience weak demand in Asia offset by improved demand in the Middle East. Lower revenue in China and reduced profitability in South America were the two main contributors to the margin reduction in 2015.

The order book in Asia/ROW overall was steady through the second half of 2015 with the full year book-to-bill ratio at December 2015 at 1.04 times.

Financial Review

Reference is made to 'Underlying operating profit' and 'Underlying EPS' below, both of which are defined in the glossary. These measures of earnings are shown because in the judgement of the Directors they allow the reader to obtain a proper understanding of the financial information and the best indication of underlying performance of the Group.

Business Performance Review

In the consolidated income statement the Group separately presents "Specific adjusting items" totalling £22.1 million and the associated tax credit of £3.3 million separately. In this Business Performance Review results are shown before these items.

Group revenue in 2015 was £911.8 million, a decrease of 1.1% on a reported basis compared with 2014.

Group EBITA before restructuring charges was £109.6 million (2014: £118.0 million) representing a margin of 12.0% (2014: 12.8%).

Group underlying operating profit (EBITA after restructuring costs) was £106.0 million (2014: £112.4 million). Underlying operating profit margin was 11.6%, compared to 12.2% for 2014.

The £3.6 million (2014: £5.6million) of net restructuring costs and other one-off items relate to a number of rationalisation actions in the second half of 2015 mainly in Asia and Europe.

The Group amortisation charge for the year was £7.1 million (2014: £8.2 million).

The net finance charge was £18.1 million (2014: £20.8 million), comprising the net bank interest and similar charges of £12.2 million (2014: £15.8 million), gain from financial instruments of £1.0 million (2014: £0.7 million) and the finance charge under IAS 19 (revised), being the interest charge on pension scheme net liabilities which was £6.9 million (2014: £5.7 million).

The tax charge for the period, excluding specific adjusting items, was £24.2 million (2014: £24.7 million). The effective tax rate, excluding specific adjusting items, was 29.8% (2014: 29.6%).

Underlying EPS was 20.8 pence (2014: 22.1 pence).

The Return on Operating Capital Employed at 31 December 2015, defined as Group underlying profit for the last 12 months divided by the sum of working capital and the net book value of tangible assets, was 27.1%, compared with 27.7% at 31 December 2014.

Specific adjusting items

In the consolidated income statement the Group presents specific adjusting items separately. In the judgment of the Directors, due to the nature and value of these items they should be disclosed separately from the underlying results of the Group to allow the reader to obtain a proper understanding of the financial information and the best indication of underlying performance of the Group.

2015

Restructuring costs

As reported in 2014, the strategic objective to drive the performance of the Electrical Carbon and Seals and Bearings businesses to mid-teen margins and beyond has resulted in the Group undertaking a significant rationalisation of the carbon material footprint. This started in 2014 with the downsizing of activities at the Swansea, UK site. This footprint rationalisation has continued in 2015 with the decision to and the announcement of the cessation of carbon material manufacturing at the Shanghai, China site. These operations will be consolidated into other Group locations, mainly the USA. This decision has resulted in a charge of £1.5 million in 2015, £0.7 million of which relates to the impairment loss on plant and equipment and the balance to site clean-up costs and other write-offs. £0.4 million is expected to be settled in cash in 2016. An income tax credit of £0.2 million was recognised in respect of these restructuring costs. The £0.7 million of impairment loss forms part of the total plant and equipment impairment loss of £6.6 million.

Business exit costs

The business exit costs in the year relate to the deconsolidation of Thermal Ceramics Sukhoy Log Limited ("Sukhoy") and the subsequent remeasurement to fair value of the retained investment.

In April 2006 the Group acquired a 51% shareholding in Sukhoy, a fibre business based near Yekaterinburg, Russia. The results and assets of Sukhoy have previously been consolidated on the basis that the Group was satisfied that it exercised management control. During 2015 there has been a deterioration in the relationship between Morgan and the minority partner, exacerbated by the increasingly difficult market conditions in Russia. As a result, it became clear to the Group towards the end of 2015 that it no longer had effective control of the business and that it was no longer appropriate to consolidate. Based on the recent financial performance and the Group's view of the future prospects of the business it was concluded that the value of the Group's investment in Sukhoy is nil. As a result the Group has recognised a £2.8 million charge in business exit costs in the 2015 accounts.

Impairment of property, plant and equipment

The impairment of property, plant and equipment for the year ended 31 December 2015 is as a result of a review of the carrying value of assets that support the Group's North America vehicle and personal protection and high-temperature furnace-lining businesses. Both of these businesses saw significant growth and investment in previous years but more recently they have been in decline. The Group has compared its expected future cash flows from these businesses with the book value of the property, plant and equipment that is dedicated to them and determined that a total impairment charge of £5.9 million is required. An income tax credit of £2.1 million was recognised in respect of the impairment charge. The £5.9 million of impairment loss forms part of the total plant and equipment impairment loss of £6.6 million.

Impairment of intangible assets

As a result of the continued reduction in demand on C&DS from UK MoD, the review of the carrying value of the remaining intangible assets of C&DS resulted in a further impairment charge of £5.8 million, relating to a full impairment of the customer relationships. Following this impairment charge, the carrying value of the C&DS intangibles was £9.8 million, all in respect of technology and trademarks. This was supported by the current expectations of the future trading performance of the C&DS business. An income tax credit of £1.0 million was recognised in respect of the impairment charge.

Loss on disposal of business

As reported in the 2014 Annual Report and Accounts, on 30 January 2015 the Group completed the sale of a Thermal Ceramics business in Wissembourg, France. This business manufactures low-temperature fibre boards used mainly in the building industry. The Group has incurred a loss on the disposal of this business of £6.1 million in 2015, in addition to the £1.9 million of business exit costs recognised in the 2014 accounts.

IAS 19 Employee Benefits

The IAS 19 charges are summarised in the table below.

The Group pension deficit has decreased by £7.3 million since last year end to £204.5 million (2014: £211.8 million) on an IAS 19 (revised) basis. The UK defined benefit pension schemes deficit marginally decreased by £1.4 million to £117.4 million (2014: £118.8 million) and the US deficit decreased by £3.7 million to £55.1 million (2014: £58.8 million).

Cash Flow

Cash flow from operations was strong at £135.6 million (2014: £120.0 million). Free cash flow before acquisitions and dividends was £26.3 million (2014: £40.1 million). Dividend payments increased to £31.4 million (2014: £30.2 million).

Net debt at the year-end was £216.0 million (2014: £207.0 million), representing a net debt to EBITDA ratio of just below 1.6 times (2014 year end: 1.4 times).

Foreign exchange - translation effect - illustration

For illustrative purposes, the table below provides details of the impact on 2015 revenue and EBITA if the actual reported results, calculated using 2015 average exchange rates, were restated at 2015 closing exchange rates.

* Other FX rate change is the weighted average of a number of other currencies, of which the largest declines are in Russian Rouble, Brazilian Real and South African Rand, partially offset by the Japanese yen.

Final Dividend

The Board is recommending a final dividend, subject to shareholder approval, of 7.0 pence per Ordinary share (2014: 7.0 pence). The dividend will be paid on 27 May 2016 to Ordinary shareholders on the register of members at the close of business on 6 May 2016.

 Glossary of terms

The proposed final dividend is based upon the number of shares outstanding at the balance sheet date.

* Details of 'Specific adjusting items' are given in note 5 to the financial statements.