Morgan Advanced Materials Regulatory News (MGAM)

FULL-YEAR RESULTS FOR THE PERIOD ENDED 31st DECEMBER 2013

Results summary

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

^ 2012 results have been restated to reflect the impact of the adoption of IAS 19 (revised) Employee Benefits. Further details are given in the financial review below.

Financial highlights

· As expected, revenue at constant currency in the second half of 2013 was similar to the first half. On a full-year basis, revenue was down 4.9% on both a reported and constant currency basis compared with 2012

· Group EBITA margin for the second half of 2013 increased to 12.9%, a 90 basis points improvement compared with the 12.0% achieved in the first half; for the full-year the margin was 12.4% (2012: 12.0%)

· Across the regions, North America, Europe and Asia/Rest of World, trading conditions in the second half of 2013 have remained similar to those experienced in the first half of the year, with revenue stable at constant currency. EBITA margins improved across all three regions during the second half of the year

· Good progress on the portfolio reshaping announced in the November 2013 IMS, completing transactions in respect of businesses that accounted for c.£20 million of revenue in 2013, and which resulted in £12.9 million of write-offs, which are shown in the income statement as 'specific adjusting items' in a separate column

· Operating cash flow was good at £127.0 million (2012: £126.8 million) and net debt was reduced to £186.5 million (2012: £192.8 million), resulting in a year end net debt to EBITDA ratio of 1.3 times (2012: 1.3 times)

· Proposed final dividend increased to 6.7 pence per share (2012: Final 6.4 pence per share), giving a full-year dividend of 10.5 pence (2012: 10.0 pence), a 5.0% increase. 

· Trading results from our overseas operations are converted at the average exchange rates for the year. In the second half of 2013, sterling strengthened against many of the Group's key currencies (including the US dollar, Euro and Yuan). If the year end closing exchange rates were applied to these reported results, then the reported 2013 revenue and EBITA would have been £44.2 million and £6.8 million lower respectively.

Operational highlights and other developments

· The key driver of the One Morgan organisational structure announced last year is to accelerate profitable growth by investing in core advanced materials technologies where we have differentiation, global market leadership positions and sustainable competitive advantage. Some key highlights of this in the past year include:

· Increasing once more in 2013 our R&D spend both in absolute terms and as a percentage of revenue, meaning the Group's R&D spend is circa two and a half times greater than in 2006

· The announcement today of a new Global Materials Centre of Excellence for Structural Ceramics in Stourport, UK. This will seek to emulate for our structural ceramics applications the world-leading breakthroughs already made in our Superwool® fibre range from the now well established Global Centre of Excellence in Bromborough, UK

· A 23% year-on-year increase in capital expenditure in 2013 to c.1.25 times depreciation, as we invest for profitable growth in new greenfield facilities such as Dalian, China and in converting our high-temperature fibre lines to be Superwool enabled. In 2014, we will be making further investments in growth capex including a new greenfield Superwool® plant in the Middle East. This will enable us to leverage the strong local demand in petrochemical and aluminium markets and, at the same time, accessing low cost energy, which will make it one of our lowest cost plants in the world. Total gross capital expenditure in 2014 is expected to be c.£40 million.

· A significant increase in graduate recruitment to 26, providing a pipeline of engineers and commercial leaders of the future. Our target for 2014 is to increase our intake to over 30 graduates

· The One Morgan model has also delivered benefits to the cost base through the simpler, leaner structure. These combined with other operational initiatives undertaken in the latter part of 2012 have delivered the stated cost base improvements of £10 million in 2013 with a further £3-4 million to come through in 2014 as the full-year benefits of actions taken during the course of 2013 are realised

· The Group has made significant progress reshaping its portfolio

· Since the November 2013 IMS announcement, we have made good progress in exiting c.£20 million of revenue from businesses with low/breakeven margins and limited differentiation. Other low margin businesses accounting for an additional £30 million of annual revenue are being targeted for divestment in 2014

· We have also substantially enhanced the returns of businesses that are currently below our target of mid teen operating margins. In particular the margin of the largest of these business areas, electrical carbon, has been improved significantly in 2013 from mid single digits into double digits with further progress expected in 2014

· Our mid-teen margin businesses have also shown progress in 2013. Of particular note is the improvement in high-temperature insulating fibre margins which meant that in the second half of 2013 Thermal Ceramics delivered, for the first time, margins in excess of 15%.

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

"Demand in our end-markets remained subdued in 2013. Against this industry backdrop our focus has been on driving portfolio reshaping initiatives and operational improvements. At the same time we have continued our ongoing investment in world-leading technology to enhance our sustainable competitive advantage.

Outlook

Our expectation for the first half of 2014 is that end-market conditions overall remain similar to those of the past several months with subdued global industrial growth. The order book going into 2014 was stable with a book to bill ratio of just over one times. The Group's focus on active portfolio reshaping initiatives, ongoing operational improvements and innovation underpin the Board's confidence that we will continue to make further progress in 2014."

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Operating Review

The results for 2012 set out below have been restated to reflect the impact of IAS 19 (revised) Employee Benefits.

Sales by market for Full-Year 2013

North America

Revenue for the North American region for the year was £359.9 million, representing a decrease of 4.4% compared with the £376.3 million in 2012. At constant currency the year-on-year decrease was 5.6%. Revenue in the second half of 2013 was 1.5% lower than that in the first half at constant currency.

EBITA for the region was £55.5 million (2012: £55.7 million) with margin improving to 15.4% (2012: 14.8%). The EBITA margin in the second half of 2013 also improved to 16.0%, compared with 14.8% in the first half of 2013.

Trading conditions in the second half continued to be mixed as they were in the first half of the year.

The Thermal Ceramics business continued to perform well in its niche automotive applications, in particular supplying for catalytic converters, and in general industrial markets. As in other parts of the world, the North American Thermal Ceramics business continued to be impacted by a lack of large project orders in the petrochemical market despite high quote activity. The business has continued to expand the manufacturing capacity for Superwool® low bio-persistence fibre and has successfully increased market penetration. A focus on attractive niche markets, the gross margin benefits of Superwool compared to refractory ceramic fibre (RCF) and operational improvements all contributed to higher operating margins.

The Technical Ceramics business in 2013 was impacted by weaker hard disk drive and semi-conductor business, though there have been some signs of general market recovery in the latter part of the fourth quarter of 2013 and there is a solid order book for the start of 2014. Sales in the second half of the year to the aerospace and industrial gas turbine market were impacted by customer inventory adjustments, specifically cores used in the manufacture of turbine blades. The Technical Ceramics business is starting to see some benefits from the strong oil and gas market and particularly to the increase in hydraulic fracturing activity, "fracking".

The electrical carbon business, has delivered broadly flat revenue through 2013 relative to the second half of 2012. Progress has been made in sales to the wind energy market where market share has been won in the after-market based on our differentiated product offering and service levels. Demand for high-temperature insulation products into the renewables sector and for US body armour remained at the low levels experienced in the first half of the year.

A sizeable uplift in the performance of the electrical carbon business came from the operational streamlining actions taken as a result of One Morgan.

The region overall has progressively seen the benefits of the One Morgan organisational model and is already a mid-teen margin business despite difficult trading conditions during the year. The focus as one unified region in 2014 is on delivering further performance improvement and creating new opportunities for profitable growth.

Europe

Revenue for the European region for the year was £357.3 million, representing a decrease of 1.2% compared with the £361.7 million in 2012. At constant currency the year-on-year decrease was 3.7%. Revenue in the second half of 2013 was 1.5% lower than that in the first half at constant currency.

EBITA for the region increased to £42.0 million (2012: £37.5 million), improving the full-year margin of the region to 11.8% (2012: 10.4%). This margin improvement came through increasingly during the year with the EBITA margin in the second half of 2013 being 12.3% compared with 11.2% in the first half of 2013.

The trading conditions in Europe remained broadly stable in the second half of the year when compared to the first half, both in terms of revenue and order book. In the Thermal Ceramics business, comprising principally high-temperature insulating fibre and firebrick, revenue from larger engineering project business continued to be weak as customers delayed major investment decisions. Since the end of the year, Morgan merged its UK-based thermal fired shapes business with Magma Ceramics & Catalysts, a UK-based fired shapes specialist business, in return for a 35% minority stake in the enlarged Magma business. In the Technical Ceramics business, sales of cores to both the aerospace and the industrial gas turbine market weakened in the second half of 2013, but this was offset by growth in sales to the medical market.

The electrical carbon business remained ahead of 2012 revenue due to market share gains and some growth in sales of rotary products to the wind energy market. Similarly, the seals and bearings business delivered growth in sales to the petrochemical and water markets. Revenue in Composites and Defence Systems (C&DS) improved in the second half compared to the first half of the year, with improving profitability based on a combination of product mix, volume and operational cost reductions. By the end of second half of 2013 C&DS exited its low margin spares and logistics contract with the UK MoD in respect of the Mastiff fleet of vehicles which generated c.£12 million of revenue in 2013.

EBITA margin in the second half of the year continued to improve despite a broadly flat revenue profile half-on-half. Delivery of operational improvements across the region, including site closures and headcount reductions, particularly in the electrical carbon and C&DS businesses were the major contributors to the improving margin.

Asia & Rest of the World

Revenue for the Asia & Rest of the World region for the year was £240.6 million, representing a decrease of 10.7% compared with the £269.5 million in 2012. At constant currency the decrease was 5.7%. Revenue in the second half of 2013 was 4.4% higher than that in the first half at constant currency.

EBITA for the region was £26.4 million (2012: £32.8 million), a margin of 11.0% (2012: 12.2%). The EBITA margin in the second half of 2013 was 11.2%, compared with 10.8% in the first half of 2013.

Trading across the region has remained subdued through 2013. Both China and India have continued to see challenging market conditions in 2013 with industrial, steel and petrochemical markets which make up the majority of our business in the region not yet showing much sign of upturn. Large engineering and project orders have remained at low levels throughout the period. Growth has been achieved in niche markets such as automotive, fire protection and rail. Most encouragingly, new sales have been made in to the Asian medical market, specifically cochlear implants and feed through devices. Revenue from the Middle East increased in the second half of 2013 in the petrochemical industry with refurbishment/replacement work coming through. The Molten Metal Systems business with close to 50% of its business in the region was impacted by weak automotive and aluminium demand, particularly in India.

The region continued to improve its margins into the second half of the year despite market demand showing little pickup as yet. The organisational changes in the region and the cost reductions following site closures in Australia and a cessation of higher cost fibre manufacturing lines in Japan and South Africa with material sourced from lower cost plants elsewhere in the region have all contributed to this improving performance.

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 the Directors consider that they give the best indication of underlying performance.

Business Performance Review

In the consolidated income statement the Group separately presents "Specific adjusting items" totalling £12.9 million and the associated tax credit of £1.8 million separately. In the Business Performance Review below results are shown before these items.

Group revenue in 2013 was £957.8 million, a decrease of 4.9% on both a reported and constant currency basis compared with 2012

Group EBITA before restructuring charges was £119.0 million (2012: £120.9 million) representing a margin of 12.4% (2012: 12.0%). EBITA margin in the second half of this year was 12.9%, a 90 basis points improvement compared to the 12.0% in the first half of 2013.

Group underlying operating profit (EBITA after restructuring costs) 2013 was £108.5 million (2012: £107.7 million). Underlying operating profit margin was 11.3%, compared to 10.7% for 2012.

The restructuring costs of £10.5 million (2012: £13.2 million) relate mainly to the actions that the Group has undertaken as a consequence of moving to the One Morgan model and the re-organisation into geographical regions.

The Group amortisation charge for the year was £8.3 million (2012: £8.3 million).

The net finance charge was £23.3 million (2012: £22.7 million), comprising the net bank interest and similar charges of £17.0 million (2012: £16.9 million), which is flat year-on-year, and the finance charge under IAS 19 (revised), being the interest charge on pension scheme net liabilities which was £6.3 million (2012: £5.6 million).

The tax charge for the period was £21.1 million (2012: £21.6 million). The effective tax rate, excluding specific adjusting items, is 27.4% (2012: 28.2%).

Underlying EPS was 21.5 pence (2012: 21.7 pence).

The Return on Operating Capital Employed at 31 December 2013, 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 27.5%, compared with 26.3% at 31 December 2012.

Specific adjusting items

In the consolidated income statement the Group presents specific adjusting items totalling £12.9 million and the associated tax credit of £1.8 million separately. In the judgement 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. No specific adjusting items were incurred in 2012.

Business exit costs

This relates to Composites and Defence Systems and is a result of the exit of the UK MoD vehicles logistics and spares contract and the completion of UK MoD Urgent Operational Requirements (UOR) for new vehicle builds. Specifically the charge comprises a £5.7 million provision against inventory and a £1.6 million provision for building exit costs and impairment of other assets. An income tax credit of £1.6 million has been recognised in respect of these items.

Impairment of intangible assets

The impairment of intangible assets consists of a £3.3 million impairment of goodwill and intangible assets originally recognised on acquisition of Morgan AM&T Hairong Ltd (formerly Changsha Hairong New Materials Co., Ltd) ('Hairong'), the Group's lithium ion business, based on the current view of the future financial performance of Hairong. An income tax credit of £0.2 million has been recognised in respect of this item.

Loss on disposal of business

On 28 December 2013 the Group disposed of 23.85% of the share capital of Assam Carbon Products Ltd ('Assam') for nil consideration. The Group retains a 28.8% shareholding. As a result of the transaction the Group no longer has control of Assam and has therefore deconsolidated the assets and liabilities of Assam in these consolidated financial statements. The loss recognised on the disposal of this shareholding was £2.3 million. Based on the Group's remaining 28.8% shareholding the Group accounts for the shareholding as an associate. The fair value of the Group's remaining investment has been measured at nil.

Adoption of IAS 19 (revised) Employee Benefits

For the year ended 31 December 2013 the Group is required to adopt IAS 19 (revised) Employee Benefits and the results for the year ended 31 December 2012 have been restated to reflect this.

The impact of the changes on the full-year ended 31 December 2012 is a £4.2 million reduction in profit after taxation, consisting of:

a) a £1.1 million reduction in Group EBITA, Group underlying operating profit and operating profit as a result of the requirement to reclassify pension scheme administration costs from net finance charge to operating costs;

b) a £4.7 million reduction in Underlying PBT and profit before tax due to the new requirement for the expected return on assets to be calculated by applying the corporate bond yield discount rate to the balance sheet pension-related assets;

c) a £0.5 million reduction in taxation charge as a result of the above changes.

The IAS 19 (revised) charges are summarised in the table below.

The Group pension deficit has decreased by £22.2 million since last year end to £144.6 million on an IAS 19 (revised) basis. The main movement was in the US defined benefit pension schemes, where the deficit decreased by £23.4 million to £39.3 million (2012: £62.7 million), due primarily to a higher discount rate (2013: 5.0%, 2012 4.2%) and the weakening of the US$ versus £ sterling. The UK deficit increased by £3.7 million to £75.0 million (2012: £71.3 million).

Cash Flow

The net cash inflow from operating activities was £127.0 million (2012: £126.8 million). Free cash flow before acquisitions and dividends was £37.4 million (2012: £48.9 million). Dividend payments increased to £24.7 million (2012: £16.1 million) as a consequence of the decision to bring forward the payment of dividends. As a result, in 2013 three dividend payments were made; the 2012 interim, the 2012 final and the 2013 interim dividend.

Net debt at the year end was £186.5 million (2012: £192.8 million) representing a net debt to EBITDA ratio of 1.3 times (2012 year end: 1.3 times). At 31 December 2013 all of the Group's bank facility of £150 million was undrawn.

Foreign exchange - translation effect - illustration

During the second half of 2013 sterling strengthened substantially against most currencies that Morgan trades in, and by year end the closing rates of exchange of a number of currencies were materially different from the average rates used in the income statement. For illustrative purposes, the table below provides details of the impact on 2013 revenue and EBITA if the actual reported results, calculated using 2013 average exchange rates, were restated at 2013 closing exchange rates.

* Other FX rate change is the weighted average of a number of other currencies, of which the largest movements are in Indian Rupees, Australian Dollars and Brazilian Real.

In addition to the large decrease in revenue and EBITA caused by currency translation, the EBITA margin would also be reduced by 10-15 basis points if 2013 closing rates were applied.

Final Dividend

The Board has recommended a final dividend of 6.7 pence per Ordinary share (2012: 6.4 pence). This is an increase of 4.7% compared to the final dividend declared in 2012. The dividend will be paid on 30 May 2014 to Ordinary shareholders on the register of members at the close of business on 16 May 2014.

A scrip alternative to the cash dividend will not be offered as part of the final dividend.

Glossary of terms

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

Adoption of new and revised Standards

IAS 19 (revised) Employee Benefits

During the period, the Group has applied IAS 19 (revised) Employee Benefits. This has led to a restatement of the comparatives for 2012. The impact on the Group of the revised standard is as follows:

(a) interest cost and expected return on assets were replaced by a net interest cost which is calculated by applying the discount rate to the net defined benefit obligation.

(b) pension scheme administration costs have been reclassified from net finance charge to operating costs. Such costs include the PPF levy and actuary, audit, legal and trustee charges which, under the previous IAS 19, were allowed to be included within the net finance charge.

(c) past service costs are recognised immediately instead of being accrued over the vesting period.

The impact of the changes was a £5.1 million reduction in profit for the period (2012: £4.2 million), as follows:

(i) A £1.4 million increase in operating costs before restructuring costs and amortisation of intangible assets (2012: £1.1 million);

(ii) A £4.3 million increase in net financing costs (2012: £3.6 million);

(iii) A £0.6 million reduction in income tax expense (2012: £0.5 million).

The changes resulted in a £5.1 million increase in other comprehensive income excluding profit for the period (2012: £4.2 million).

The above changes reduced basic/diluted earnings per share for 2012 by 1.5 pence, with basic earnings per share reducing from 20.2 pence to 18.7 pence and diluted basic earnings per share reducing from 19.9 pence to 18.4 pence.

The impact of the changes on the balance sheet was a £0.2 million increase in the net employee benefits obligation.

The increase in operating costs resulted in a decrease in Regional EBITA for the Group's new reportable operating segments (see note 2) as follows: North America £0.6 million (2012: £0.5 million) and Europe £0.8 million (2012: £0.6 million).