Morgan Advanced Materials Regulatory News (MGAM)

FULL YEAR RESULTS FOR THE PERIOD ENDED 31ST DECEMBER 2012

Results summary

·; Group EBITA margin for the full year was 12.1% (2011: 13.0%) and Group underlying operating profit margin (after restructuring and one-off costs) was 10.8% (2011: 12.9%)

·; The Ceramics Division EBITA margin continued to improve in 2012 to 14.3% (2011: 13.5%) on revenue that was 1.9% lower than 2011 on a constant currency basis

·; The Engineered Materials Division revenue for the year was down 15.2% on a constant currency basis with EBITA margins declining to 9.4% (2011: 13.4%).

·; Proposed final dividend increased by 6.7% to 6.4 pence per share (2011: Final 6.0 pence per share), giving a full year dividend of 10.0 pence (2011: 9.25 pence)

·; The net debt at the year end was reduced by a further £22.6 million to £192.8 million (2011: £215.4 million), resulting in a net debt to EBITDA ratio of 1.3 times (2011: 1.2 times)

Organisational Model

·; The Group today announces a new organisation structure creating a 'One Morgan' business model based on a regional structure of North America, Europe and Asia/Rest of World, which positions the Group for enhanced profitable growth

·; As part of the changes in organisation the Group will also be changing its name to 'Morgan Advanced Materials plc' which better reflects the full depth and breadth of its materials science and application engineering capabilities

Commenting on the results, strategy and outlook for Morgan Crucible, Chief Executive Officer, Mark Robertshaw said:

"While the past year saw much tougher trading conditions in some of the Group's end markets, 2012 underlying operating profit before one-off costs was still the second highest in Morgan Crucible's history. Ninety percent of the Group performed resiliently but substantial demand declines in the defence and renewable energy markets meant disappointing results in the Engineered Materials Division. As a result, significant actions were taken in the second half of 2012 to align our cost base with the reduced demand levels particularly in the Engineered Materials businesses. 

Our continued focus is on driving profitable growth through positive mix shift and innovation in new products and technologies targeted at attractive market segments. To this end, we are announcing today some important changes to the Group's structure which will see us move to a single 'One Morgan' model organised on a regional basis. This will enable us to present a single, integrated advanced materials face to our customers across all our geographies and all our end-markets to position us better for growth and at the same time to improve our operational cost efficiency. In conjunction with the move to a new organisational structure, we are changing the Group's name to 'Morgan Advanced Materials plc', which we believe provides a more accurate reflection of the breadth and depth of our capabilities across a wide range of technically demanding, high performance engineering applications.

Outlook

The Group's overall order intake levels have stabilised in the last two to three months. Nevertheless, we expect the end-market environment to remain fluid and uncertain in 2013. In this environment, our focus remains on self-help initiatives. Based on the restructuring actions taken in the second half of 2012 and some initial benefits from the 'One Morgan' model, we expect to improve our profit run rate by some £10 million in 2013 compared to the second half of 2012."

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Strategy update - 'One Morgan' model

The Group is announcing today a change to its organisation, creating a 'One Morgan' business based on a regional structure of North America, Europe and Asia/Rest of World. This is a natural progression and continues the direction of travel over recent years from having nine divisions a decade ago to a single integrated business focused on advanced materials science and specialised application engineering to solve technically demanding challenges for its customers. 

The Group believes this new structure will enhance its growth prospects by maximising the full breadth and depth of advanced materials capabilities for its customers and by accelerating the pace of positive mix change into target markets. The new structure will also improve the overall level and flexibility of operating costs by removing duplication and combining support functions with some initial benefits in 2013, but estimated full annualised benefits of £6-8 million from 2014.

The new structure will have tailored regional priorities to drive profitable growth with a common goal to grow through cycle at above GDP levels in each region and deliver mid-teen operating profit margins and operating ROCE of c.35%.

Operating Review

Reference is made to Divisional EBITA throughout the operational reviews for each of the Divisions and is shown in the table below:

* Includes plc costs (eg. Report & Accounts, AGM, Non-Executives) and Group Management costs (eg. Corporate head office rent, utilities, staff etc.).

** One-off items include the costs of restructuring activity, gain on disposal of property and other one-off items.

Ceramics

Business performance

Revenue in the Morgan Ceramics Division was £660.5 million (2011: £685.2 million), representing a decrease at reported rates of 3.6%. At constant currency the decrease in revenue was 1.9%.

Revenue for the Technical Ceramics Business in 2012 was £273.3 million (2011: £285.1 million), a decrease of 4.1% at reported rates. Revenue was lower by 4.0% on a constant currency basis. The Thermal Ceramics Business revenue decreased by 3.2% to £387.2 million in 2012 (2011: £400.1 million). On a constant currency basis, the year-on-year decrease was 0.4%.

For Technical Ceramics EBITA was £42.7 million (2011: £43.1 million). Technical Ceramics improved its EBITA margin by 50 basis points, to 15.6% for the year (2011: 15.1%). Thermal Ceramics EBITA increased in the year to £51.9 million (2011: £49.6 million). The EBITA margin for Thermal Ceramics increased by 100 basis points to 13.4% (2011: 12.4%). Overall the Ceramics Divisional EBITA margin showed continued good improvement to 14.3% (2011: 13.5%).

Business developments

In 2012 major investments were focused on the Superwool® fibre programme and the conversion of existing RCF capacity. Significant investment in both equipment and people continued to be made in both the Asian and South American markets. Capital was invested in Kailong, China and Daegu, Korea to increase fibre capacity and the thermal insulation product range. The Division also received approval from the Board to build a new fibre plant to be built in the Middle East, which is becoming an attractive and rapidly growing market. Smaller but important investments were made to extend existing brazing capability in the Hayward California facility. A ceramic grinding facility was established in Yixing, China and in the USA capacity was increased for making CVD Diamond coatings for the growing Asian semiconductor equipment market.

Resources and capabilities in Asia and South America were further developed and added to, resulting in a number of positive new business enquiries being generated. These are now making their way into commercial plans.

The Thermal Ceramics Business made good progress with continued roll-out of high-temperature insulation products. These include a range of differentiated and patent protected products based on the range of Superwool® chemistries. Good progress was made in the engineering business which takes Morgan Ceramics products and through applications engineering adds value to give customers a package design that will give them a more energy efficient and safer operating solution. Typical applications are found in the chemical processing, aluminium, iron and steel and passive fire protection industries. New product development in the Thermal Ceramics Business remains concentrated in the field of low bio-persistent fibre where the Business continues to develop even higher temperature resistant materials.

Work in the Technical Ceramics Business focused on moving towards newer, more differentiated products that will continue to drive positive mix shift. This was achieved by increasing the number of new business projects in higher margin, high value added end markets such as healthcare and aerospace, whilst continuing to reduce exposure to more commoditised and economically cyclical product areas.

The 'Operational Excellence' programme has now been firmly embedded across the whole Division. It involves benchmarking projects that have accountability and responsibility at plant level, and it delivered year-on-year improvements in operational efficiency. These locally based and managed initiatives continue to be co-ordinated and supported by engineering and research and development personnel to optimise manufacturing processes.

The continuous operational improvement programmes, cost reduction initiatives and emphasis on positive price pass-through have all helped to deliver the margin growth achieved in 2012 and are expected to continue to contribute in 2013 and beyond.

Outlook

Following the decline in market demand in the second half of 2012, entering 2013 the orderbooks for both Technical and Thermal Ceramics appear to have stabilised. There remain weaker areas such as the construction market in Europe and whilst quotation levels for engineering projects in Thermal Ceramics are strong, the speed of conversion is slower than expected. Both Businesses are continuing to pursue new business opportunities and increase their share of customer spend in 2013 which, along with a number of the Superwool® capital investments coming fully on line during the year, should leave them well placed to improve performance in 2013 and beyond.

Engineered Materials

Revenue in the Engineered Materials Division was £347.0 million (2011: £415.8 million), representing a decrease at reported rates of 16.5%. At constant currency this decrease in revenue was 15.2%. The revenue of the Morgan AM&T Business was £243.4 million (2011: £276.1 million) representing a decrease of 11.9% at reported rates and 10.6% on a constant currency basis; NP Aerospace revenue was £57.8 million (2011: £93.0 million), a decline of 37.8%. MMS revenue was £45.8 million (2011: £46.7 million), a decrease of 1.9% at reported rates, but an increase of 4.8% on a constant currency basis.

Divisional EBITA for the Engineered Materials Division was £32.5 million (2011: £55.7 million), a margin of 9.4% (2011: 13.4%). Morgan AM&T EBITA margin was 8.5% (2011: 12.7%), NP Aerospace EBITA 6.2% (2011: 14.0%) and MMS Divisional EBITA margin was 17.7% (2011: 16.5%).

The deterioration in performance in the Morgan AM&T (excluding NP Aerospace) business principally comes from the significant softening in demand for renewables products in the solar (high-temperature products) and wind markets and US body armour business. Demand for renewable and clean energy products fell off sharply at the end of the first quarter and remained depressed throughout the year, with the largest impacts being a 50% year-on-year drop in demand for high-temperature insulation products and a sharp decline of the wind energy market in China. The Business also saw some softening of demand across its main electrical and seals and bearings activities as the year progressed, which now appears to have stabilised.

The Business reacted to the reduced volumes by making significant headcount and cost reductions across the globe, including the closure or downsizing of a number of sites, particularly in Continental Europe.

Despite the challenges presented by slowing industrial markets and virtually stalled renewable energy markets, the Business continued to invest selectively in technology, in expanding its low-cost manufacturing capability, and in the Business's overall capability in China in order to continue to advance its ability to compete in its markets.

The reduction in NP Aerospace's revenue reflected the continued decline in Urgent Operational Requirements demand from the UK Ministry of Defence ('MoD') for tactical wheeled vehicles. NP Aerospace margin was impacted in 2012, particularly in the second half, by vehicle contract closures resulting in both settlements with the MoD and prudent assessments of inventory remaining from the long period of supporting Urgent Operational Requirements for the MoD in Afghanistan. Entering 2013, revenue predictions are stable and the cost base has been right sized for this level of revenue. NP Aerospace continues to build a significant pipeline of opportunities both through the USA, focused on key USA military vehicle OEMs, and through a growing series of export opportunities, outside of the UK and the USA. Investment in technology has continued to be a high priority and has yielded break through developments in lighter weight personal protection and highly advanced vehicle armour systems that have the potential to generate significant growth in the future.

The MMS Business continued to perform well with revenue growth (at constant currency rates) and margin improvements as global demand for non-ferrous castings continued to increase, in part driven by increasing demand from the automotive sector. Good growth in China, North America and the Far East more than offset a decline in demand from Europe. The Business continues to benefit from its low-cost manufacturing footprint, strong market presence in dynamic growth markets, and continued progress in driving operational excellence.

Outlook

Entering 2013, Morgan AM&T's order book continues to reflect softness in demand from most sectors and geographies, although demand appears to have stabilised towards the end of 2012. Demand for seals and bearings showed some signs of strengthening towards the end of the year and into January. Demand from the solar sector is expected to remain depressed at least until the second half of the year, while demand from China's wind sector is expected to improve from a very low base through the course of 2013. The Business is also pursuing a number of US body armour contracts that hold promise for improving revenue in 2013 and beyond.

NP Aerospace revenue in 2013 is expected to be in line with 2012, with lower vehicle systems demand from the UK MoD being offset by a growth in export sales.

The outlook for the MMS Business remains positive with continued sales growth expected in the dynamic growth markets and in particular, China. The commitment to operational excellence and market leading positions in dynamic growth economies means MMS is well placed to continue to deliver high margin growth again in 2013.

Financial Review

Reference is made to 'Underlying operating profit' and 'Underlying EPS' below, both of which are defined at the front of this statement. These measures of earnings are shown because the Directors consider that they give the best indication of underlying performance.

Group revenue in 2012 was £1,007.5 million, a decrease of 8.5% compared to 2011. On a constant currency basis, revenue decreased by 6.9%.

Group EBITA before restructuring charges and one-off items was £122.0 million (2011: £143.4 million) representing a margin of 12.1% (2011: 13.0%).

Group underlying operating profit (EBITA after restructuring costs and one-off items) for 2012 was £108.8 million (2011: £141.5 million). Underlying operating profit margin was 10.8%, compared to 12.9% for 2011.

The restructuring costs and other one-off items of £13.2 million charge (2011: £1.9 million charge) relate to a range of actions across the Group, mainly in the second half of the year, as the Group took action to reduce the cost base, particularly in the AM&T business.

The Group amortisation charge for year was £8.3 million (2011: £8.3 million).

The net finance charge was £19.1 million (2011: £21.8 million). This charge was primarily net bank interest and similar charges of £16.9 million (2011: £20.4 million), a decrease of £3.5 million. The decrease in the net interest charge is due to the continuing reduction in average debt levels and lower interest rates following the refinancing of the bank facilities in 2011. The balance of the finance charge under IFRS is the net interest charge on pension scheme net liabilities which was £2.0 million (2011: £0.9 million) and interest expense on the unwinding of discount on deferred consideration of £0.2 million (2011: £0.5 million) relating to the NP Aerospace acquisition.

The tax charge for the period was £22.1 million (2011: £32.6 million). The effective tax rate for the year was 27.1% (2011: 29.3%) and the medium term view is that the rate will remain below 30%.

The £21.0 million credit shown as 'discontinued operations' relates to a release of tax liabilities in the period that were set up in prior years relating to business disposals.

Underlying EPS was 23.2 pence (2011: 29.9 pence).

The Group pension deficit has increased by £31.5 million since last year end to £166.6 million on an IAS 19 basis. The main movements were in the US and UK defined benefit pension schemes. The UK scheme deficit increased by £23.9 million to £71.3 million (2011: £47.4 million) and the US scheme increased by £4.2 million to £62.7 million (2011: £58.5 million). This increase was mainly due to lower discount rates.

For the year ended 31 December 2013 the Group is required to adopt IAS 19 (revised) Employee Benefits.

The impact is summarised in the table above and the reasons for changes are: 

The Group does not expect there to be a material change in the Group pension deficit as a result of the change in the accounting standard.

The net cash inflow from operating activities was £126.8 million (2011: £137.4 million). Free cash flow before dividends was £48.9 million (2011: 57.8 million).

Net debt at the year end was £192.8 million (2011: £215.4 million) representing a net debt to EBITDA ratio to 1.3 times (2011: 1.2 times). At the end of the year all of the Group bank facility, of £150 million, was undrawn.

Cash Flow

* Net debt is defined as interest-bearing loans and borrowings, bank overdrafts less cash and cash equivalents.

Final Dividend

The Board has recommended a final dividend of 6.4 pence per Ordinary share. This is an increase of 6.7% compared to the final dividend declared in 2011. The dividend will be paid on 31 May 2013 to Ordinary shareholders on the register of members at the close of business on 19 April 2013.

A scrip alternative to the cash dividend will again be offered as part of this final dividend giving shareholders the opportunity to increase their shareholding without incurring dealing costs or stamp duty.

The financial statements were approved by the Board of Directors on 14 February 2013 and were signed on its behalf by:

Mark Robertshaw, Chief Executive Officer

Kevin Dangerfield, Chief Financial Officer

Revenue from external customers is based on geographic location of the end-customer. Segment assets are based on geographical location of the assets.