Morgan Advanced Materials Regulatory News (MGAM)

Full-year results for the period ended 31 December 2022

Strong growth, returns and strategic progress

1. Definitions of these non-GAAP measures can be found in the glossary of terms on page 45, reconciliations of the statutory results to the adjusted measures can be found on pages 13 to 16. Throughout this report these non-GAAP measures are clearly identified by an asterisk (*) where they appear in text.

2. EPS is presented on a 'continuing' and a combined 'continuing and discontinued' basis for statutory reporting. Further details are provided in note 8 to the consolidated financial statements.

Group highlights

• Strong organic constant-currency* revenue growth of 11.2%

• Improving returns: adjusted operating profit margin* +50 bps to 13.6%, ROIC +190 bps to 22.4%, adjusted EPS* +24.3% to 33.8p and dividend per share up 31.9%

• Strong balance sheet with net debt*/EBITDA (excl. leasing)* of 0.8 times.

• Disciplined and targeted investment: £67.0 million pension contribution with UK pension funds substantially de-risked, and increased investment to support future growth in both working capital (+£35m) and capital expenditure (+£29.3m)

• Absolute CO2e emissions (from scope 1 and 2) reduced by 8.2% compared with 2021

• Outlook for FY2023 adjusted operating profit* unchanged from 7 February 2023 guidance

Commenting on the results, Chief Executive Officer, Pete Raby said:

"I am delighted with the progress we have made in delivering on all aspects of our strategy in 2022. We worked hard to recover significant cost inflation in a challenging environment which, together with robust growth in all of our markets, has enabled us to achieve further expansion of margin and ROIC. We were pleased to be able to take a further significant step in de-risking the Company's pension liabilities and have made good progress in reducing CO2e emissions. This performance, with our continued investment in product innovation, provides us with a very solid foundation to deliver the strategy and financial framework set out in our recent Capital Markets Event.

Demand has remained robust coming into this year, particularly from our faster growing markets. As previously announced, the cyber event we experienced in January has impacted sales and profitability in the short term, but our recovery is on track. We are also taking the opportunity to accelerate the modernisation of our IT infrastructure.

I want to thank our employees for their hard work since the start of this year and in achieving the excellent progress we made in 2022. Our leading, differentiated positions in attractive end markets and the calibre of our team position us well to continue to execute our strategy and further strengthen the growth and sustainability of the business."

Outlook

Customer demand remains robust. As a consequence of the cyber incident, we expect revenue in our first half to be in line with prior year, whilst experiencing temporary cost inefficiency as previously highlighted. In the second half, we expect to return to growth, with growth and margins in line with our financial framework. Outlook for full year adjusted operating profit1 is unchanged from our guidance of 7 February 2023.

We have seen further inflation as expected which we will continue to offset through pricing and operational improvement. Our targeted investment in capacity for our faster growing segments continues at pace and we expect to increase further our exposure to these markets.

1. Definitions of these non-GAAP measures can be found in the glossary of terms on page 45, reconciliations of the statutory results to the adjusted measures can be found on pages 13 to 16.

Our purpose

Our purpose is to use advanced materials to make the world more sustainable and to improve the quality of life. This purpose guides our actions: it underpins our work to reduce our environmental impact, informs how we treat our people, and ensures we fulfil our responsibility for good corporate governance.

We deliver on our purpose through the products that we make and the way that we make them.

· We improve the quality of life by supporting medical diagnostics with our power tubes in medical scanners. Our feedthroughs are at the core of cochlear implants and our seals are used in blood pumps. These products transform people's lives.

· Our products help keep people safe. We are proud to design fire protection in everything from cars to tunnels, and ships to oil platforms.

· We design and manufacture our products to help customers save energy.

· Our carbon brushes are integral to wind turbines and power generators, and enable electrified rail transport.

· Our ceramic rollers are used to make thin-film solar panels, our insulation is used in solar towers and steam turbines, and our ceramic cores are used to make more efficient industrial gas turbines. These are all products which promote a more sustainable and environmentally secure future for our planet.

Our strategy

Our strategy builds on our strengths and focuses the Group on scalable businesses in attractive markets, and on the development of our three core capabilities in customer focus, application engineering and materials science. To continue the development of our core capabilities we have three execution priorities:

Big positive difference - making sure we govern our business the right way, looking after the environment, looking after our people and operating to high ethical standards. This priority supports our focus on living and breathing our commitments on inclusion, treating people fairly, reducing waste, managing our water consumption, and reducing emissions.

Delight the customer - following on from our foundational work on sales effectiveness, we are working to shape our product and service offerings further based on customer needs, with the overall objective of making our business more customer-centric. We gathered customer feedback during 2022 through a range of channels and are using that to understand our customer segments in more detail. This will enable us to align our product, service and support offerings more closely to customer needs.

Innovate to grow - many of our customers have an increasing need to reduce their energy consumption and CO2e emissions, and need our help. This priority supports our focus on working with the customer to innovate in traditional heavy industries whilst also contributing to greener technologies for the future.

We want to accelerate our growth, by winning in our core markets and increasing our exposure to four faster growing market segments: clean energy, clean transportation, semiconductors and healthcare.

We have been focusing our product and business development efforts in these markets over the recent years to develop new and differentiated products that solve complex problems for our customers.

· Clean energy. Growth in energy storage, brushes and slip rings for onshore wind applications and ceramic and carbon products used in solar panel manufacture.

· Clean transportation. Growth in our rail collector business for metro and main rail applications, and in water and vacuum pump components for electric vehicle applications.

· Semiconductors. Growth from carbon and ceramic consumable supply into key semiconductor process steps including crystal growth, deposition, lithography and etch.

· Healthcare. Growth from medical imaging and implantable devices.

During 2022, organic constant-currency* revenue growth in these segments was 11.7%, which represented 19.6% of our revenue overall.

Our environment, social and governance (ESG) priorities

In March 2021, we set stretching targets to improve our environmental, social and governance performance and become a more sustainable business. We take these commitments seriously and have plans in place to deliver against them in the coming years, making a step change in our performance.

Whilst some progress has been made, we recognise that there is more work to do, particularly around water sustainability, safety and employee engagement.

Protect the environment

· Our goal is to be a scope 1 and 2 CO2e net zero business by 2050. Our 2030 target is to reduce our scope 1 and scope 2 CO2e emissions by 50% (from a 2015 baseline).

· Our aspiration is to use water sustainably across our business. Our 2030 target is to reduce our overall water usage by 30% and reduce our water usage in high and extremely high stress areas by 30% (from a 2015 baseline).

Provide a safe, fair and inclusive workplace

· Our aspiration is to create an environment and culture with zero harm to our employees. Our 2030 target is a lost-time accident rate below 0.1 (lost-time accidents per 100,000 hours worked).

· Our aspiration is that our employee demographics reflect the communities that we operate in. Our 2030 target is for 40% female representation across our leadership population of our organisation.

· Our aspiration is to be a welcoming and inclusive environment where our employees can grow and thrive. Our 2030 target is to attain a top quartile employee engagement score. 

Our performance to date is as follows:

· Scope 1 & 2 CO2e emissions. We have continued to migrate to carbon-free electricity across the Group with 49% of our power carbon-free by the end of the year. We are continuing to improve the efficiency of our gas fired kilns and have started to evaluate electrically fired options for some kiln types. During the year we reduced our absolute scope 1 and 2 CO2 emissions by 8.2%.

· Water usage in stressed areas. Our overall water usage increased by 11.6% during the year driven by volume increases, changes in mix to more water-intensive products and processes and some significant water leaks. A number of process and infrastructure improvements were completed during the year and we expect to see this reflected in our water usage in 2023. Our water usage in stressed areas decreased by 0.7%, despite volume growth, showing the impact of improvement projects in our plants in high water stress areas.

· Lost-time accident (LTA) rate. Our LTA rate was 0.28 (2021 0.22), a worsening of our accident performance, in part reflecting a larger number of new employees in the business as we ramped volumes up. We are not satisfied with this and we are working hard to improve. We have a broad programme of work underway across the Group to improve our safety position and performance. During the year we deployed our 'thinkSAFE' training in all of our plants. We increased the robustness of plant-level activities including start of shift briefings, safety tours, near miss identification and reporting and 5S (Sort, Straighten, Shine, Standardise and Sustain) and we put greater focus on cross-group learnings through safety shares and quarterly focus topics. Safety is our top priority and continues to receive a high level of focus throughout the organisation.

· Diversity in our leadership population. Our diversity position was unchanged over the year with 29% females in our leadership population. We implemented a number of changes during the year, including the establishment of three employee resource groups for women, veterans and the LGBTQ+ communities. We have also introduced training for hiring managers and we are standardising and modernising our parental leave policies, starting in the UK.

· We completed our engagement survey in December 2022 and our engagement score was 53, a three point improvement on 2021's engagement score of 50. We have a lot of activity underway at a local level to improve, and we have a long way to go, but we are pleased to see an improvement year-on-year.

Our Group Environment, Health and Sustainability Director and Group HR Director coordinate our improvement projects. In addition, the Board reviews progress quarterly and takes an active role in holding the executive team to account on improving ESG performance.

Enquiries

Results presentation today

There will be an analyst and investor presentation at 09:00 (UK time) today via web-conference.

A live audio webcast and slide presentation of this event will be available on www.morganadvancedmaterials.com  We recommend you register by 08:45 (UK time).

1. Definitions of these non-GAAP measures can be found in the glossary of terms on page 45, reconciliations of the statutory results to the adjusted measures can be found on pages 13 to 16.

2. Details of specific adjusting items from continuing operations are disclosed in note 4 to the consolidated financial statements.

Thermal Ceramics

Revenue for Thermal Ceramics for the year was £421.4 million, representing an increase of 15.5% compared with £364.7 million in 2021. This has been driven by recovery in industrial, metals, aerospace and automotive markets, growing petrochemical project revenues and growth in clean energy applications. On an organic constant-currency* basis, year-on-year revenue increased by 11.4%.

Thermal Ceramics operating profit was £44.3 million (2021: £37.8 million), and operating profit margin was 10.5% (2021: 10.4%), with the slight margin improvement due to increased volumes, with price offsetting inflation. Details of the specific adjusting items of £2.8 million (2021: £2.1 million) are included in note 4. Adjusted operating profit* was £48.7 million (2021: £42.0 million) with an adjusted operating profit* margin of 11.6% (2021: 11.5%).

Molten Metal Systems

Revenue for Molten Metals Systems for the year was £57.8 million, an increase of 21.2% compared with £47.7 million in 2021. Revenue growth was driven by a strong end-market demand, share wins in the aluminium market and growth in copper and precious metals. On an organic constant-currency* basis, year-on-year revenue increased by 15.8%.

Molten Metal Systems operating profit was £7.5 million (2021: £6.0 million), and operating profit margin was 13.0% (2021: 12.6%). Margin improvement was from volume leverage and price and efficiency actions more than offsetting inflation. Adjusted operating profit* was £7.8 million (2021: £6.3 million) with adjusted operating profit margin* of 13.5% (2021: 13.2%).

Electrical Carbon

Revenue for Electrical Carbon for the year was £188.7 million, representing an increase of 14.4% compared with £164.9 million in 2021, driven by growth in the semiconductor and transportation market segments. On an organic constant-currency* basis, year-on-year revenue improved by 9.7%.

Electrical Carbon operating profit was £39.1 million (2021: £25.6 million), and operating profit margin was 20.7% (2021: 15.5%). Margin improvement was driven by operational efficiency savings and the impact of pricing increases which more than offset cost inflation and investment. Adjusted operating profit* was £39.7 million (2021: £32.8 million) with an adjusted operating profit margin* of 21.0% (2021: 19.9%).

Seals and Bearings

Revenue for Seals and Bearings in 2022 was £148.5 million, representing an increase of 9.3% compared with £135.9 million in 2021, with the expected reduction in armour sales more than offset by growth in industrial, petrochemical and aerospace markets. On an organic constant-currency* basis, year-on-year revenue increased by 2.8%. Ceramic armour sales in 2022 were £25.5 million (2021: £32.3 million).

Seals and Bearings operating profit was £16.6 million (2021: £22.0 million), and operating profit margin was 11.2% (2021: 16.2%). Details of the specific adjusting items of £1.6 million (2021: £nil) are included in note 4. The margin declined due to manufacturing inefficiencies in the second half and a provision for a quality claim with an armour customer. Adjusted operating profit* was £19.0 million (2021: £22.9 million), with an adjusted operating profit margin* of 12.8% (2021: 16.9%).

Technical Ceramics

Revenue for the Technical Ceramics global business unit in 2022 was £295.7 million, an increase of 24.6% compared with £237.3 million in 2021, driven by growth in semiconductor, healthcare, industrial, defence and aerospace market segments, with a combination of market growth and share wins. On an organic constant-currency* basis, year-on-year revenue increased by 15.8%.

Technical Ceramics operating profit was £39.2 million (2021: £18.9 million), and operating profit margin was 13.3% (2021: 8.0%). Details of the specific adjusting items of £1.2 million (2021: £6.0 million) are included in note 4. Margin improvement was driven by volume leverage, pricing and efficiency actions and the remaining benefits from our 2020 restructuring programme. Adjusted operating profit* was £41.7 million (2021: £26.4 million), with an adjusted operating profit margin* of 14.1% (2021: 11.1%).

Group financial review

Group revenue was £1,112.1 million (2021: £950.5 million), an increase of 17.0% on a reported basis compared with 2021, reflecting continued strong demand across all global business units.

Operating profit was £140.8 million (2021: £113.1 million) and operating profit margin was 12.7% (2021: 11.9%). Profit before tax was £131.6 million (2021: £104.3 million). Specific adjusting items from continuing operations before tax in 2022 were a net charge of £5.5 million (2022: £5.4 million), primarily relating to the impairment of non-financial assets. Further details are included under 'Specific adjusting items' below.

Group adjusted operating profit* was £151.0 million (2021: £124.5 million). Adjusted operating profit margin* was 13.6%, compared with 13.1% for 2021.

The Group amortisation charge was £4.7 million (2021: £6.0 million).

The net finance charge was £9.2 million (2021: £9.2 million), comprising: net bank interest and similar charges of £5.4 million (2021: £5.3 million); net interest on IAS 19 pension obligations of £1.4 million (2021: £1.6 million); and the interest expense on lease liabilities of £2.4 million (2021: £2.3 million) resulting from IFRS 16 Leases.

Looking forward to 2023, we anticipate that the net finance charge will be around £13-15 million, comprising: net bank interest and similar charges of £10-12 million; net interest on IAS 19 pension obligations of £0.5 million; and net interest expense on lease liabilities of £2 million.

The Group tax charge from continuing operations, excluding specific adjusting items, was £37.1 million (2021: £29.7 million). The effective tax rate, excluding specific adjusting items, was 27.0% (2021: 27.1%). Note 6 to the consolidated financial statements on page 32 provides additional information on the Group's tax charge. Looking forward to 2023, we anticipate that the effective tax rate will be around 26%-28%. On a statutory basis, the Group tax charge was £36.0 million (2021: £28.2 million), higher than the previous year due to the higher taxable profits.

Basic earnings per share from continuing operations was 30.6 pence (2021: 23.9 pence) and adjusted earnings per share* was 33.8 pence (2021: 27.2 pence). Details of these calculations can be found in note 8 to the consolidated financial statements on page 34.

The Group's balance sheet and liquidity remain robust. Net debt* for the year ended 31 December 2022 was £200.4 million, with net debt excluding lease liabilities* of £148.5 million, with £34.5 million of senior notes due to mature in October 2023. The Group has cash and cash equivalents* of £117.7 million and undrawn headroom on its revolving credit facility of £154.0 million.

Our key financial covenants are measured on a pre-IFRS 16 Leases basis. As at 31 December 2022, net debt* to EBITDA*, excluding lease liabilities, was 0.8 times compared to a covenant not to exceed 3.0 times, and our interest cover was 32.9 times, compared to a covenant to exceed 4.0 times.

Specific adjusting items

In the consolidated income statement, the Group presents specific adjusting items separately. In the judgement of the Directors, as a result of 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 an alternative understanding of the financial information and an indication of the underlying performance of the Group.

Details of specific adjusting items arising from continuing operations during the year and the comparative period are given in note 4 to the consolidated financial statements. Specific adjusting items in relation to discontinued operations are disclosed in note 7 to the consolidated financial statements.

1.Specific adjusting items relating to discontinued operations are disclosed in note 7.

In 2022, pre-tax specific adjusting items from continuing operations totalled £5.5 million (2021: £5.4 million) and comprised the following:

2022

Impairment of non-financial assets

Seals and Bearings, Asia

An impairment charge of £0.6 million has been recognised relating to assets purchased to support a customer contract which did not materialise.

A further impairment charge of £1.0 million has been recognised after reassessing the value in use of property, plant and equipment in a business in Asia which is taking longer than anticipated to generate revenues. This represented a partial impairment of the assets; the carrying value of the assets following this impairment was £5.2 million. The calculation of value in use was performed as at December 2022. A long-term growth rate of 1.0% was used for years beyond the five-year forecast period and in calculating the terminal value. A pre-tax discount rate of 12.9% was used to determine the value in use.

Thermal Ceramics, Europe

An impairment charge of £1.2 million has been recognised following a fire in December which destroyed a warehouse and inventory. The assets have subsequently been written off.

An impairment charge of £1.1 million has been recognised after reassessing the value in use of property, plant and equipment in a business in France which is experiencing limited growth and under utilisation of key assets. This represented a partial impairment of the assets; the carrying value of the assets following this impairment was £0.3 million. The calculation of value in use was performed as at December 2022. A long-term growth rate of 1.0% was used for years beyond the five-year forecast period and in calculating the terminal value. A pre-tax discount rate of 13.7% was used to determine the value in use.

Thermal Ceramics, South America

An impairment charge of £0.9 million has been recognised in relation to assets associated with a closed manufacturing line.

Technical Ceramics, Asia

An impairment charge of £1.7 million was recognised after reassessing the value in use of property, plant and equipment in a business in Asia which is taking longer than anticipated to generate revenues. This represented a partial impairment of the assets; the carrying value of the assets following this impairment was £3.2 million. The calculation of value in use was performed as at December 2022. A long-term growth rate of 1.0% was used for years beyond the five-year forecast period and in calculating the terminal value. A pre-tax discount rate of 12.9% was used to determine the value in use.

Review of cumulative impairment of non-financial assets

Impairment charges of £52.6 million for non-financial assets which the business continues to use have been recorded during the current and previous years (Technical Ceramics, Asia £7.7 million, Technical Ceramics, ceramic cores £28.8 million, Thermal Ceramics £15.1 million and Seals and Bearings, Asia £1.0 million). These impaired amounts could be reversed if the related businesses were to outperform significantly against their budget. A sensitivity analysis was carried out using reasonably possible changes to key assumptions in assessing the value in use of these non-financial assets. This did not result in a material reversal of the impaired amounts.

Restructuring costs

A credit of £0.6 million has been recognised in the current year representing a release of restructuring provisions booked in previous years in relation to the Group's restructuring programme. Whilst this programme was completed in 2021, we retain restructuring provision of £10.5 million for the Group's obligations at the balance sheet date (2021: £11.8 million). This provision includes remaining lease exit costs and multi-employer pension obligations for two sites which were closed during the year ended 31 December 2021. The cash outflows relating to the pension obligations may continue for up to 19 years, subject to any settlement being reached in advance of that date. Cash outflows in relation to the lease may continue for the next four years. Refer to note 15 for further information.

Net profit on disposal of business

The Group disposed of its investment in the joint venture Sukhoy Log, based in Russia, during the year. This disposal generated a net profit of £0.4 million. Refer to note 2 for further information.

2021

Impairment of non-financial assets

Technical Ceramics, Asia

An impairment charge of £6.0 million was recognised after reassessing the value in use of property, plant and equipment in a business in Asia which is taking longer than anticipated to generate revenues. This represented a partial impairment of the assets; the carrying value of the assets following this impairment was £5.4 million. The calculation of value in use was performed as at December 2021. A long-term growth rate of 1.0% was used for years beyond the five-year forecast period and in calculating the terminal value. A pre-tax discount rate of 11.5% was used to determine the value in use.

Electrical Carbon, Europe and North America

Impairment charges of £4.8 million and £1.0 million were recognised after assessing the viability of two development assets in Europe and North America, respectively. The European asset was not deemed viable as we were unable to commission it safely and the American asset was not deemed to be commercially viable.

Thermal Ceramics, North America

An impairment charge of £0.6 million was recognised relating to assets associated with closed manufacturing lines within Thermal Ceramics.

Restructuring costs

A net credit of £0.1 million was recognised in the year ended 31 December 2021 representing £2.1 million of further redundancy and closure costs related to the Group's restructuring programme, offset by a £2.2 million release of restructuring provisions booked during 2020 in relation to this programme.

Net profit on disposal of business

The Group disposed of its 35% shareholding in Jemmtec Limited and the business assets associated with the Latrobe business during the year ended 31 December 2021. These disposals generated a profit of £7.2 million and a loss of £0.1 million, respectively. Refer to note 2 for further information.

Business closure and exit costs

A £0.2 million charge was recognised relating to the liquidation of businesses in Europe and Asia.

Foreign currency impact

The principal exchange rates used in the translation of the results of overseas subsidiaries were as follows:

For illustrative purposes, the table below provides details of the impact on 2022 revenue and Group adjusted operating profit* if the actual reported results, calculated using 2022 average exchange rates were restated for GBP weakening by 10 cents against USD in isolation and 10 cents against the Euro in isolation:

1. Definitions of these non-GAAP measures can be found in the glossary of terms on page 45, reconciliations of the statutory results to the adjusted measures can be found on pages 13 to 16.

Retranslating the 2022 full year results at the March 2023 closing exchange rates would lead to revenue of £1,111.9 million and adjusted operating profit* of £149.2 million.

Cash flow

1. Definitions of these non-GAAP measures can be found in the glossary of terms on page 45, reconciliations of the statutory results to the adjusted measures can be found on pages 13 to 16.

Cash generated from continuing operations was £59.1 million (2021: 135.9 million).

Free cash flow before acquisitions, disposals and dividends* was £(46.9) million (2021: £66.2 million).

Net debt* at the year end was £200.4 million (2021: £96.5 million), representing a net debt* to EBITDA* ratio of 1.1 times (2021: 0.6 times).

Net debt* excluding lease liabilities was £148.5 million (2021: £46.7 million), representing a net debt* to EBITDA* ratio excluding lease liabilities of 0.8 times (2021: 0.3 times).

Defined benefit pension plans

The Group pension deficit has decreased by £87.1 million since last year end to £15.6 million on an IAS 19 (revised) basis, following a one-off contribution of £67.0 million to the UK Schemes during the year.

• The UK Schemes' deficit decreased by £76.9 million to a surplus of £25.2 million (2021 deficit: £51.7 million), (discount rate 2022: 4.81%; discount rate 2021: 1.92%).

• The US Schemes' deficit increased by £1.5 million to £9.2 million (2021: £7.7 million), (discount rate 2022: 4.99%; discount rate 2021: 2.71%).

• The European Schemes' deficit decreased by £11.1 million to £27.9 million (2021: £39.0 million), (discount rate 2022: 3.70%; discount rate 2021: 0.90%).

• The Rest of World Schemes' deficit decreased by £0.6 million to £3.7 million (2021: £4.3 million), (discount rate 2022: 5.30%; discount rate 2021: 2.90%).

The most recent full actuarial valuations of the UK Schemes were undertaken as at 31 March 2022 and resulted in combined assessed deficits of £49.7 million on the 'Technical Provisions' basis. The Company subsequently agreed with the Trustees to make a lump sum contribution to the Schemes of £67.0 million on 29 December 2022 in lieu of the remaining contributions that would otherwise have been due under the existing recovery plans from the 31 March 2019 valuations. The sum paid also represented the value of the deficit on the more prudent 'Long Term Objective' basis on the date of that agreement, 25 October 2022. As a result, no further contributions to the Schemes are expected to be required pending the results of the next full valuations as at 31 March 2025.

Final dividend

The Board is recommending a final dividend, subject to shareholder approval, of 6.7 pence per share on the Ordinary share capital of the Group, payable on 3 July 2023 to Ordinary shareholders on the register at the close of business on 9 June 2023. The ex-dividend date is 8 June 2023.

Together with the interim dividend of 5.3 pence per share paid on 18 November 2022, this final dividend, if approved by shareholders, brings the total distribution for the year to 12.0 pence per share (2021: 9.1 pence).

A total dividend of 12.0 pence per share represents a dividend cover of adjusted EPS* of 2.8 times.

The Board has committed to grow the Ordinary dividend as the economic environment and the Group's earnings improve, targeting a dividend cover of around 2.5 times over the medium term. This level of cover ensures sufficient resources are available to continue to invest to support the Group's long-term prospects, as well as to meet the needs of other stakeholders of the Group, including by making deficit contributions to the Group's defined benefit pension schemes.

Definitions and reconciliations of non-GAAP to GAAP measures

Reference is made to the following non-GAAP measures throughout this document. These measures are shown because the Directors consider they provide useful information to shareholders, including additional insight into ongoing trading and year-on-year comparisons. These non-GAAP measures should be viewed as complementary to, not replacements for, the comparable GAAP measures. As defined in the basis of preparation on page 23, these measures are calculated on a continuing basis.

Adjusted operating profit

Adjusted operating profit is stated before specific adjusting items and amortisation of intangible assets. Specific adjusting items are excluded on the basis that they distort trading performance. Amortisation is excluded consistent with previous years.

1. Corporate costs consist of central head office costs.

1. Corporate costs consist of central head office costs.

Organic growth

Organic growth is the growth of the business excluding the impacts of acquisitions, divestments and foreign currency. This measure is used as it allows revenue and adjusted operating profit to be compared on a like-for-like basis.

Commentary on the underlying business performance is included as part of the Operational review on pages 6 and 7.

Year-on-year movements in segment revenue

Year-on-year movements in segment and Group adjusted operating profit

1. Corporate costs consist of central head office costs.

Group EBITDA

Group EBITDA is defined as operating profit before specific adjusting items, depreciation and amortisation of intangible assets. The Group uses this measure as it is a key metric in covenants over debt facilities, these covenants use EBITDA on a pre-IFRS 16 basis. A reconciliation of operating profit to Group EBITDA is as follows:

Free cash flow before acquisitions, disposals and dividends

Free cash flow before acquisitions, disposals and dividends is defined as cash generated from continuing operations less net capital expenditure, net interest (interest paid on borrowings, overdrafts and lease liabilities, net of interest received), tax paid and lease payments. The Group discloses this measure of free cash flow as this provides readers of the consolidated financial statements with a measure of the cash flows from the business before corporate level cash flows (acquisitions, disposals and dividends).

A reconciliation of cash generated from continuing operations to free cash flow before acquisitions, disposals and dividends is as follows:

Net cash and cash equivalents

Net cash and cash equivalents is defined as cash and cash equivalents less bank overdrafts. The Group also discloses this measure as it provides an indication of the net short term liquidity available to the Group.

Net debt

Net debt is defined as borrowings, bank overdrafts and lease liabilities, less cash and cash equivalents. The Group also discloses this metric excluding lease liabilities as this is the measure used in the covenants over the Group's debt facilities.

Return on invested capital

Return on invested capital (ROIC) is defined as the 12-month Group adjusted operating profit (operating profit excluding specific adjusting items and amortisation of intangible assets) divided by the 12-month average adjusted net assets (third-party working capital, plant and equipment, land and buildings, right-of-use assets, intangible assets and other balance sheet items). This measure excludes long-term employee benefits, deferred tax assets and liabilities, current tax payable, provisions, cash and cash equivalents, borrowings, overdrafts and lease liabilities.

Adjusted earnings per share

Adjusted earnings per share is defined as operating profit adjusted to exclude specific adjusting items and amortisation of intangible assets, plus share of profit of associate less net financing costs, income tax expense and non-controlling interests, divided by the weighted average number of Ordinary shares during the period. This measure of earnings is shown because the Directors consider it provides an indication of adjusted performance which is less impacted by adjusting items and therefore reflects the underlying performance trends in the business.

A reconciliation from IFRS profit to the profit used to calculate adjusted earnings per share* is included in note 8 to the consolidated financial statements on page 34.

Constant-currency revenue and adjusted operating profit

Constant-currency revenue and adjusted operating profit are derived by translating the prior year results at current year average exchange rates. These measures are used as they allow revenue to be compared excluding the impact of foreign exchange rates. Page 10 provides further information on the principal foreign currency exchange rates used in the translation of the Group's results to constant-currency at average exchange rates.

Consolidated income statement

1. Details of specific adjusting items from continuing operations are given in note 4 to the consolidated financial statements.

2. Profits from discontinued operations are entirely attributable to the Shareholders of the Company.

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

Consolidated statement of comprehensive income

Consolidated balance sheet

Consolidated statement of changes in equity

Consolidated statement of cash flows