Morgan Advanced Materials Regulatory News (MGAM)

Morgan Advanced Materials

Half-year results for the six months ended 30 June 2019

1. The Group disposed of the Composites and Defence Systems business in 2018, the disposal group formed the Composites and Defence Systems operating segment and has been classified as a discontinued operation under IFRS 5. In line with the requirements of IFRS 5 all periods presented in these condensed consolidated financial statements are for continuing operations, with separate disclosure of discontinued operations where appropriate. Further details are provided in notes 2 and 7 to the condensed consolidated financial statements.

2. Definitions of these non-GAAP measures can be found in the glossary of terms on page 39, reconciliations of the statutory results to the adjusted measures can be found on pages 10 to 14.

3. Cash generated from continuing and discontinued operations.

4. 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 condensed consolidated financial statements.

Highlights

·; Strategy implementation continuing to progress well and remains on track.

·; Revenue growth of 1.0% on an organic constant-currency* basis.

·; Group headline operating profit margin* of 12.8% an improvement of 70bps from organic revenue* growth and benefit of efficiency actions.

·; Headline EPS* growth of 3.0% reflecting improvement in operating profit.

·; The expectations of profitability for the full year remain unchanged.

Pete Raby - Chief Executive Officer:

'The Group has made good progress during the first half of the year. We are on track with the implementation of our strategy, improving our sales capability, driving new product development and improving operational performance. We have delivered organic constant-currency* revenue growth of 1.0% under more challenging end market conditions and we have expanded our headline operating margin* to 12.8%.

Looking forward into the second half of 2019 there are a number of global headwinds and uncertainties leading to a slowing of industrial markets. Based on our current assessment of business trends and orders, we expect Group revenues to be broadly flat in the second half compared to the prior year. Our expectations of profitability for the full year remain unchanged.'

Strategic progress

The Group has four execution priorities which will continue the implementation of our strategy.

We have made good progress against those priorities in the first half of 2019:

1. Drive sales effectiveness and market focus. The Group is focused on improving a number of aspects of its sales capabilities: sales processes and their efficiency, the management of key customer accounts and distribution channels, and deeper understanding of end-markets and faster-growing segments.

Throughout 2019 we have been deploying the approaches we developed in 2018 including: embedding our pricing tools across the sales teams; rolling out our sales skills training to our commercial organisation; launching our new sales incentive plans across; deploying and enhancing our customer relationship management (CRM) system and implementing a clearly defined and mapped sales process with associated leading KPIs across the business.

2. Extend technical leadership. Investment has been increased to build our technical lead and accelerate new product development, supporting the Group's emphasis on both manufacturing process and materials technology, producing materials which transform our customers' processes.

We have maintained investment levels in line with the prior year and we continue to focus our new product development efforts in our four research and development Centres of Excellence. Our development teams are focused on 5-10 priority development projects in each global business unit that deliver improved materials properties and performance to meet the needs of our customers, and expand our fundamental understanding of the characteristics of our materials as well as their performance in varied environments.

There has been good progress across our business including the development of new insulation products for our Thermal customers; further development of materials and material combinations to enhance corrosion resistance and resistivity for semiconductor manufacturing applications; continued development of our additive manufacturing capability for ceramic materials expanding the size and tolerance range of parts that we can produce. We are making good progress with a number of developments of our carbon materials for both electrical and seals and bearings applications. We are developing materials with better wear characteristics, better temperature performance and higher current carrying capabilities for a range of end markets.

3. Increase investment in people management and development. Our objective is to strengthen our leadership capability and deepen functional capabilities across the business, including in sales and engineering.

We have been filling the last remaining gaps in our leadership teams and working with them to strengthen their performance as teams. In 2019 we also launched new Group-wide development programmes for our future leaders at multiple levels of the organisation. These programmes are designed to develop a global network and pipeline of leaders who inspire and develop our people, drive alignment to our purpose and strategic execution priorities, and to support the leaders to drive and manage change. As part of the sales effectiveness programme, we have training programmes underway with our sales and customer service functions.

We also continue to enhance our approach to driving higher performance by integrating our leadership behaviours into a globally consistent performance management process, creating a stronger link between performance and reward, and building the performance culture across the Group.

4. Improve operational execution. Our objective is to strengthen our operational capabilities, reduce operational costs to fund reinvestment in the business, and improve delivery and quality performance.

We continue to make good progress with our operational efficiency programmes, with year-to-date net savings underpinning the margin expansion seen in the first half. These savings come from a wide variety of projects in automation, global sourcing and multiple local projects designed to improve efficiency and eliminate waste across all of our global business units.

Enquiries

Results presentation today

There will be an analyst and investor presentation at 11.30 (UK time) today at The Lincoln Centre, 18 Lincoln's Inn Fields, London, WC2A 3ED.

A live video webcast and slide presentation of this event will be available on morganadvancedmaterials.com. We recommend you register by 11.15 (UK time).

Basis of preparation

Non-GAAP measures

Throughout this report adjusted measures are used to describe the Group's financial performance. These are not recognised under IFRS or other generally accepted accounting principles (GAAP). 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.

The Executive Committee and the Board manage and assess the performance of the business on these measures as they are more representative of performance, facilitate meaningful year-on-year comparisons and hence provide additional useful information to shareholders.

Throughout this report these non-GAAP measures are clearly identified by an asterisk (*) where they appear in text, and by a footnote when they appear in tables and charts. Definitions of these non-GAAP measures can be found in the glossary of terms on page 39, reconciliations of the statutory results to the adjusted measures can be found on pages 10 to 14.

The Group disposed of the Composites and Defence Systems business in 2018. The disposal group formed the Composites and Defence Systems operating segment and has been classified as a discontinued operation under IFRS 5 Non-current Assets Held For Sale and Discontinued Operations. In line with the requirements of IFRS 5 all periods presented in these condensed consolidated financial statements are for continuing operations, with separate disclosure of discontinued operations where appropriate.

Further details on the disposal of Composites and Defence Systems are provided in notes 2 and 7 on pages 23 and 30 of the condensed consolidated financial statements.

Operating review

1. Definitions of these non-GAAP measures can be found in the glossary of terms on page 39, reconciliations of the statutory results to the adjusted measures can be found on pages 10 to 14.

Thermal Products Division

Revenue for Thermal Products for the six months ended 30 June 2019 was £232.5 million, representing a decrease of 3.8% compared with £241.8 million in 1H 2018. On an organic constant-currency* basis, year-on-year revenue decreased by 3.3%.

Divisional EBITA* for Thermal Products was £28.4 million (1H 2018: £29.7 million) with a Divisional EBITA* margin of 12.2% (1H 2018: 12.3%).

Revenue for Thermal Ceramics for the six months ended 30 June 2019 was £207.8 million, representing a decrease of 4.4% compared with £217.3 million in 1H 2018. On an organic constant-currency* basis, year-on-year revenue decreased by 3.8%. The year-on-year decrease in revenue was primarily driven by the automotive market segment, which declined £7.7 million (30%) from prior year, and the decline in the overall European industrial market segment. Growth was seen in the North American and Asian chemical and petrochemical (CPI) market segments as well as iron and steel.

EBITA* for Thermal Ceramics for the six months ended 30 June 2019 was £25.7 million (1H 2018: £26.1 million) with EBITA margin* of 12.4% (1H 2018: 12.0%). The year-on-year margin improvement was driven by prior year plant closures and operational efficiencies.

Revenue for Molten Metals Systems for the six months ended 30 June 2019 was £24.7 million, representing an increase of 0.8% compared with £24.5 million in 1H 2018. On an organic constant-currency* basis, year-on-year revenue increased by 0.4%. The core crucibles business growth was primarily driven by good performance in India and South America, offsetting automotive industry driven demand decline in China, North America and Europe. Industrial equipment sales increased globally into the precious metals fire assay markets.

EBITA* for Molten Metals Systems for the six months ended 30 June 2019 was £2.7 million (1H 2018: £3.6 million) with EBITA margin* of 10.9% (1H 2018: 14.7%). During 2019 margin was impacted by one-off restructuring costs, as well as the annualised impact of prior year planned investments in technology, product development and sales capability, designed to improve the future prospects of the business.

Carbon and Technical Ceramics Division

Revenue for the Carbon and Technical Ceramics Division for the six months ended 30 June 2019 was £293.3 million, representing an increase of 7.6% compared with £272.6 million in 1H 2018. On an organic constant-currency* basis, year-on-year revenue increased 4.6%.

Divisional EBITA* for the Carbon and Technical Ceramics Division was £42.0 million (1H 2018: £35.6 million) with Divisional EBITA margin* of 14.3% (1H 2018: 13.1%).

Revenue for Electrical Carbon for the six months ended 30 June 2019 was £85.4 million, representing an increase of 3.0% compared with £82.9 million in 1H 2018. On an organic constant-currency* basis, year-on-year revenue increased by 2.0%.

The year-on-year growth was driven primarily by the wind and semiconductor market segments. On a regional basis, Europe achieved strong sales into the semiconductor market segment and also from sales of carbon collector strip products for electrified rail applications, supported by recent investments. Within North America products for diesel-electric locomotives in the rail market were negatively impacted by the general industrial slowdown in the region, this was partially mitigated by growth in products supporting power generation applications in the growing wind market. Sales in Asia were impacted by slowing general industrial output.

EBITA* for Electrical Carbon for the six months ended 30 June 2019 was £11.1 million (1H 2018: £10.3 million) with an EBITA margin* of 13.0% (1H 2018: 12.4%), reflecting the benefit of revenue growth supported by operational efficiency actions.

Revenue for Seals and Bearings for the six months ended 30 June 2019 was £71.1 million, representing an increase of 8.4% compared with £65.6 million in 1H 2018. On an organic constant-currency* basis year-on-year revenue increased by 5.2%. Revenue growth was driven by the petrochemical, healthcare and ceramic armour market segments, partially offset by some contraction in the Asian domestic heating circulating pumps end market caused by demand outpacing local infrastructure capabilities, and decline in the automotive market segment. In a continuation of the contracts awarded in 2017, sales of ceramic armour increased to £15 million in 1H 2019 (1H 2018: £11 million).

EBITA* for Seals and Bearings for the six months ended 30 June 2019 was £13.4 million (1H 2018: £12.1 million) with an EBITA margin* of 18.8% (1H 2018: 18.4%). The increase in volume and a continued strong continuous improvement projects pipeline yielded incremental savings, which offset cost inflation and investments in its sales and operations teams, research and development and targeted functional capabilities in support of its growth strategy.

Revenue for Technical Ceramics for the six months ended 30 June 2019 was £136.8 million, an increase of 10.2% compared with £124.1 million in 1H 2018. On an organic constant-currency* basis, year-on-year revenue increased by 6.0% primarily driven by demand increases for ceramic cores in the aerospace market, the supply of ceramic parts into the semiconductor and medical markets, and growth in the renewable energy market segment.

EBITA* for Technical Ceramics for the six months ended 30 June 2019 was £17.5 million (1H 2018: £13.2 million) with an EBITA margin* of 12.8% (1H 2018: 10.6%). Margins expanded due to the benefit of higher volume, operational efficiencies, and the implementation of the new lease accounting standard, IFRS 16.

Group financial review

Group revenue for the six months ended 30 June 2019 was £525.8 million (1H 2018: £514.4 million), an increase of 2.2% on a reported basis compared with 1H 2018, driven by improvements in the underlying business and foreign exchange. On an organic constant-currency* basis revenue increased by 1.0%.

Group headline operating profit* for the six months ended 30 June 2019 was £67.4 million (1H 2018: £62.4 million). Headline operating profit* margin was 12.8%, compared to 12.1% for 1H 2018.

Operating profit was £63.3 million (1H 2018: £58.6 million) and profit before tax was £54.7 million (1H 2018: £52.4 million). There were no specific adjusting items in either six month period.

The net finance charge was £8.6 million (1H 2018: £6.6 million), primarily comprising net bank interest and similar charges of £4.8 million (1H 2018: £4.2 million), the IAS 19 (revised) finance charge, being the interest charge on pension scheme net liabilities, of £2.3 million (1H 2018: £2.4 million), and the interest charge on the Group's lease liabilities of £1.5 million (1H 2018: £nil), following the implementation of IFRS 16 Leases.

The Group amortisation charge was £4.1 million (1H 2018: £3.8 million), with the higher year-on-year charge driven by the amortisation of computer software.

The Group tax charge was £15.3 million (1H 2018: £14.4 million). The effective tax rate was 28.0% (1H 2018: 27.5%). Further information is provided in note 6 on page 29 to the condensed consolidated financial statements.

We anticipate that the effective tax rate will remain at around 28% for the full year, with cash tax paid slightly higher than the charge to the income statement.

Headline earnings per share* was 13.8 pence (1H 2018: 13.4 pence) and basic earnings per share from continuing operations was 12.4 pence (1H 2018: 12.1 pence). Details of these calculations can be found in note 8 to the condensed consolidated financial statements on page 31.

Specific adjusting items

For the six month periods ended 30 June 2019 and 2018 there were no specific adjusting items.

Cash flow

1. Definitions of these non-GAAP measures can be found in the glossary of terms on page 39, reconciliations of the statutory results to the adjusted measures can be found on pages 10 to 14.

Cash generated from continuing operations was £61.1 million (1H 2018: £55.2 million), an improvement on 2018 driven by cash generated from operations, partially offset by movements in working capital.

Free cash flow before acquisitions, disposals and dividends* was £11.4 million (1H 2018: £20.5 million), with the increase in cash generated from operations offset by increased capital expenditure and higher cash tax paid compared to 2018, which benefitted by the one-off US pension contribution in December 2017.

Net debt* was £262.9 million (1H 2018: £188.2 million). Net debt* excluding lease liabilities was £193.9 million (1H 2018: £187.8 million), representing a net debt*(excluding lease liabilities) to EBITDA* ratio of 1.2x (1H 2018: 1.2x). Further information on the Group's net debt* is provided on page 13 and within note 11 to the condensed consolidated financial statements on page 33.

Defined benefit pension plans

The Group pension deficit has increased by £5.2 million since last year end to £195.6 million (FY 2018: £190.4 million) on an IAS 19 (revised) basis as a result of the lower European discount rates.

·; The UK schemes deficit increased by £0.1 million to £140.2 million, (discount rate 2019 2.22%; FY 2018 2.74%).

·; The US schemes deficit increased by £0.5 million to £9.3 million, (discount rate 2019 3.53%; FY 2018 4.34%).

·; The European schemes deficit increased by £4.2 million to £41.1 million, (discount rate 2019 1.00%; FY 2018 1.70%).

·; The Rest of World schemes deficit increased by £0.4 million to £5.0 million, (discount rate 2019 2.10%; FY 2018 2.60%).

Note 13 to the condensed consolidated financial statements, on pages 35 to 36, provides additional information on the Group's pension schemes.

Foreign exchange

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 first half 2019 revenue and Group headline operating profit* if the actual reported results, calculated using 2019 average exchange rates for the six months ended 30 June 2019 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 39, reconciliations of the statutory results to the adjusted measures can be found on pages 10 to 14.

Interim dividend

The Board has resolved to pay an interim dividend of 4.0 pence per Ordinary share. The interim dividend will be paid on 22 November 2019 to Ordinary shareholders on the register of members at the close of business on 1 November 2019.

Principal risks and uncertainties

The Group has an established risk management methodology, which seeks to identify, prioritise and mitigate risks, underpinned by a 'three lines of defence' model comprising of an internal control framework, monitoring and independent assurance processes. The Board considers that risk management and internal control are fundamental to achieving the Group aim of creating long-term sustainable shareholder value.

The current risks, representing those risks that the Board feels could have the most significant impact on achieving the Group's strategy of building a sustainable business for the long-term and delivering strong returns to the Group's shareholders, are set out in the 2018 Annual Report, which is available on the Group's website at morganadvancedmaterials.com.

The Group has reviewed these risks and concluded that they adequately represent the current principal risks and uncertainties of the Group and will continue to remain relevant for the second half of the financial year.

The following are the Group's principal risks and uncertainties: technical leadership; operational execution, organisational change and sales effectiveness; portfolio management; macro-economic and political environment; environment, health and safety; product quality, safety and liability; IT and cyber security; supply chain and business continuity; treasury and tax; pension funding; contract management; and compliance.

The current economic climate continues to have an impact on the Group, its customers and its suppliers. The UK's exit from the European Union (EU) may have an impact on the Group if subsequent tariff changes, or border effects, negatively impact the profitability of the Group's products or the ability to manufacture or distribute products on a timely basis. However, given the current value of the Group's UK exports to the EU (ca. £25 million in 2018) and imports into the UK from the EU (ca. £15 million in 2018), it is not considered that this will have a significant impact overall on the Group's liquidity or operations.

The Board reviews the status of all principal risks with a notable potential impact at Group level throughout the year. Additionally, the Audit Committee carries out focused risk reviews of each Division. These reviews include an analysis of principal risks, together with the controls, monitoring and assurance processes established to mitigate those risks to acceptable levels.

Going concern

As reported on pages 20, 29-30, and 116-124 of the 2018 Annual Report and Accounts, the Group meets its day-to-day working capital requirements through local banking arrangements and the committed £200 million unsecured five-year multi-currency revolving credit facility.

The Group's forecasts and projections, taking account of reasonably possible changes in trading performance, show that the Group is able to operate within the level of its committed facilities. The Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for a period of 12-months from the date of this Statement. Accordingly, they continue to adopt the going concern basis in preparing the condensed consolidated financial statements for the six months ended 30 June 2019.

Directors' Responsibility Statement

The Directors confirm that to the best of their knowledge:

·; The condensed consolidated financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union;

·; The interim management report includes a fair review of the information required by:

(a) DTR 4.2.7R of the Disclosure Guidance and Transparency Rules of the Financial Conduct Authority, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed consolidated financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

(b) DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

Information on the current directors of Morgan Advanced Materials plc responsible for providing this Statement is maintained on the Company's website at morganadvancedmaterials.com.

By order of the Board

Pete Raby

Chief Executive Officer

Peter Turner

Chief Financial Officer

25 July 2019

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 4, these measures are calculated on a continuing basis.

Headline profit and earnings measures

Group headline 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. For the six month periods ended 30 June 2019 and 2018 there were no specific adjusting items. Amortisation is excluded as the charge arises primarily on externally acquired intangible assets since the adoption of IFRS and does not therefore reflect all intangible assets consistently.

Earnings before interest, tax and amortisation (EBITA) is stated before specific adjusting items and amortisation of intangible assets. Segment EBITA is stated before unallocated corporate costs.

1.Corporate costs consist of the cost of the central head office.

1.Corporate costs consist of the cost of the central head office.

Group organic growth

Group organic growth is the growth of the business excluding the impact of acquisitions, divestments, business exits and foreign currency. This measure is used as it allows revenue and EBITA 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 4 to 6.

Year-on-year movements in segment revenue

Year-on-year movements in segment and Group EBITA

1.Corporate costs consist of the cost of the central head office.

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. 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 capital expenditure, net interest (interest paid on borrowings, overdrafts and lease liabilities, net of interest received) and tax paid.

The Group discloses this measure of free cash flow as this provides readers of the condensed 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 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 headline 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 and lease liabilities.

Headline earnings per share

Headline 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 a better indication of headline performance.

Whilst amortisation of intangible assets is a recurring charge it is excluded from these measures on the basis that it primarily arises on externally acquired intangible assets and therefore does not reflect consistently the benefit that all of Morgan's businesses realise from their intangible assets, which may not be recognised separately.

Constant-currency revenue and Group headline operating profit

Constant-currency revenue and Group headline 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 8 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.

Condensed Consolidated Financial Statements

for the six months ended 30 June 2019

Condensed consolidated income statement

1. The Group disposed of the Composites and Defence Systems business in 2018, the disposal group formed the Composites and Defence Systems operating segment and has been classified as a discontinued operation under IFRS 5. In line with the requirements of IFRS 5 all periods presented in these condensed consolidated financial statements are for continuing operations, with separate disclosure of discontinued operations where appropriate. Further details are provided in notes 2 and 7 to the condensed consolidated financial statements.

2. Details of specific adjusting items are given in note 4 to the condensed consolidated financial statements.

3. The proposed interim and approved final dividends are based upon the number of shares outstanding at the balance sheet date.

Condensed consolidated statement of comprehensive income

Condensed consolidated statement of comprehensive income (continued)

Condensed consolidated balance sheet

1. Borrowings on the comparative balance sheets have been re-presented to disaggregate lease liabilities and align with the current period. See note 1 to the condensed consolidated financial statements for more information on IFRS 16 Leases.

Condensed consolidated statement of changes in equity