Morgan Advanced Materials Regulatory News (MGAM)

Half-year results for the period ended 30 June 2023

Encouraging progress; FY23 guidance unchanged

1. Definitions of these non-GAAP measures can be found in the glossary of terms on page 43, reconciliations of the statutory results to the adjusted measures can be found on pages 16 to 20. Throughout this report these non-GAAP measures are clearly identified by an asterisk (*) where they appear in text and by a footnote where they appear in tables.

2. The return on invested capital calculation has been simplified so that it can be calculated from published information and the prior period comparative has been restated. See details on page 19.

Group highlights

• Organic constant-currency* revenue growth of 2.6%, with 5.6% from our faster growing markets

• Financial performance for the first half of the year reflects short term impact of cyber incident in January, with subsequent recovery well progressed in line with management expectations

• Semiconductor expansion underway, further increasing exposure to faster growing markets over time

• Group adjusted operating profit* margin of 9.0%; pricing measures continue to more than offset inflation

• Cash generated from continued operations of £12.9 million; temporary working capital outflow of £45.2 million to be substantially recovered by year end

• Strong balance sheet with net debt*/EBITDA (excl. leasing)* of 1.3 times

• Interim dividend maintained at 5.3p

• Absolute CO2e emissions (from scope 1 and 2) reduced by 19% compared with 1H 2022

• Outlook for FY2023 adjusted operating profit* unchanged

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

"We have delivered revenue growth in the first half in line with our expectations and continue to see the benefits of our leading differentiated positions in attractive growth markets. As previously announced, the cyber event we experienced at the start of the year has impacted sales, profitability and cash in the short term. Our recovery is well progressed and we have used this as an opportunity to accelerate investment in our IT infrastructure across the Group. I want to thank our employees for their hard work during a challenging period of recovery.

Outlook

Customer demand remains robust. We continue to see inflation across the business and have more than offset that through pricing measures. Whilst mindful of market conditions, our outlook for full-year revenue growth remains unchanged at 2-4%, with adjusted operating profit recovering in the second half, in line with our financial framework. Our targeted investment in capacity for our faster growing segments continues at pace, providing us with a solid foundation to continue to deliver in line with our strategy as we go into 2024.

Our overall outlook remains unchanged1."

1. Company-compiled summary of current analysts' forecasts for adjusted operating profit at half year 2023 is a range of £120.5 million to £131.0 million.

.

Cyber impact

We experienced a cyber attack on our networks on 8 January 2023. Our teams worked quickly to compartmentalise the network and shut down our systems to limit the damage. During the first half our recovery from this has progressed well. Our core ERP systems are online and remaining applications are being steadily recovered. We have accelerated our IT modernisation programme which includes changes to our network design, the deployment of additional security tooling, and acceleration of our Group ERP programme.

Our factories have operated throughout the disrupted first half. Our teams have worked closely with our customers to manage their deliveries and customer demand has remained robust during our recovery. Output improved steadily through the first half, as we expected.

Overall, we saw volume decline in the first quarter and volume growth in the second quarter as our factories recovered, leading to a net volume decline for the first half of around 5%. The volume decline, and inefficiencies from the cyber incident led to an operating profit impact of £23 million in the first half as we expected. Our expectation for specific adjusting items related to the incident for the year ending 31 December 2023 is unchanged at around £15 million.

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 buildings, and ships to oil platforms.

· We design and manufacture our products to help customers save energy. Our thermal insulation enables high temperature industrial processes and makes them more energy efficient. Our ceramic cores enable more efficient engines. Our carbon insulation is integral to efficient and effective semiconductor manufacturing.

· We enable cleaner power generation. Our carbon brushes are integral to wind turbines and power generators. 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. 

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 are gathering customer feedback during the year through a range of channels and 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, these customers 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 development and business development efforts in these four markets over the last several years to develop new and differentiated products that solve complex problems for our customers.

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

· Clean transportation - our rail collector business for metro and main rail applications, water and vacuum pump components for electric vehicle applications, fire protection solutions for electric vehicles.

· Semiconductors - we supply carbon and ceramic consumables for key semiconductor process steps including crystal growth, deposition, lithography and etch.

· Healthcare - enabling medical imaging and supply of low temperature insulation for medicine and vaccine transport and storage.

Organic constant-currency* revenue growth in these segments was 5.6%, and they represented 21% of our revenue overall.

Our financial framework

During our Capital Markets Event in December 2022, we introduced our financial framework:

· Organic constant-currency* revenue growth of 3%-6% through the cycle

· Adjusted operating profit margin* of 12.5%-15%

· Return on invested capital* of 17%-20%

· Leverage (net debt*/EBITDA excl. leasing*) of 1.0-2.0 times

Our framework drives enhanced earnings growth and underpins our strategy. We expect to return to our target margin range in the second half.

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 the leadership population of our organisation.

· Our aspiration is to be a welcoming and inclusive organisation 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. In the first half we have reduced our CO2e emissions by 19% compared with 1H 2022 through a combination of volume reduction in the first quarter, switching to renewable or carbon free electricity and a range of energy reduction projects across the Group.

· Water usage in stressed areas. In the first half, overall water usage decreased by 8.4% whilst high stress water usage decreased by 14.2% compared with 1H 2022. We saw benefits from capital projects to enable water harvesting and improve recycling as well as benefit from the reduced volumes. We continue to review our manufacturing processes to reduce the amount of water they consume and to implement submetering capabilities to identify further efficiencies.

· Lost-time accident (LTA) rate. Our lost time accident rate in the first half was 0.28, compared with 0.29 for 1H 2022. Following completion of our Group-wide thinkSAFE programme last year, we continue to focus on plant-level activities including start of shift briefings, safety tours, near miss identification and reporting and 5S (Sort, Straighten, Shine, Standardise and Sustain). Safety is our top priority and continues to receive a high level of focus throughout the organisation.

· Diversity in our leadership population. At 30 June 2023, we have 29% females in our leadership population, which is unchanged from 29% as at 31 December 2022. Last year we established three employee resource groups for women, veterans and the LGBTQ+ communities. Training for hiring managers continues and we are standardising and modernising our parental leave policies, starting in the UK.

• We conducted an employee engagement survey in the fourth quarter of 2022 which was designed to direct our attention to the areas which are most important to our people. During the first half, we have been communicating our improvement plans to our employees as they are being developed. Progress has been slower than desired due to the necessary focus on cyber recovery; in the second half we will continue to seek feedback through employee resource groups and meetings across all levels of the organisation to ensure we meet expectations.

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 09:30 (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 that you register by 09:15 (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). The Executive Committee and the Board manage and assess the performance of the business on these measures and they are presented as 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.

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. Definitions of these non-GAAP measures can be found in the glossary of terms on page 43, reconciliations of the statutory results to the adjusted measures can be found on pages 16 to 20.

All periods presented in these condensed consolidated financial statements are for continuing operations, with separate disclosure of discontinued operations where appropriate.

Operating review

1. Definitions of these non-GAAP measures can be found in the glossary of terms on page 43, reconciliations of the statutory results to the adjusted measures can be found on pages 16 to 20.

2. Details of specific adjusting items can be found in note 3 to the condensed consolidated financial statements.

Thermal Ceramics

Revenue for the Thermal Ceramics global business unit for the six months ended 30 June 2023 was £205.2 million, representing an increase of 2.3% compared with £200.5 million in 1H 2022. On an organic constant-currency* basis, year-on-year revenue increased by 2.1%, with growth from petrochemical and industrial market segments, partially offset by a decline in metals.

Operating profit for the six months ended 30 June 2023 was £11.4 million (1H 2022: £21.8 million) with an operating profit margin of 5.6% (1H 2022: 10.9%), with margin decline due to the volume reduction in the first quarter and inefficiencies from the cyber incident, whilst pricing measures continue to recover inflation. Adjusted operating profit* was £14.0 million (1H 2022: £22.7 million) with an adjusted operating profit margin* of 6.8% (1H 2022: 11.3%).

Electrical Carbon

Revenue for the Electrical Carbon global business unit for the six months ended 30 June 2023 was £95.5 million, representing an increase of 4.6% compared with £91.3 million in 1H 2022. On an organic constant-currency* basis, year-on-year revenue increased by 3.7%, with strong growth from semiconductors partially offset by decline in industrial markets.

Operating profit for the six months ended 30 June 2023 was £16.0 million (1H 2022: £18.6 million) with an operating profit margin of 16.8% (1H 2022: 20.4%), with margin decline from a fall in volumes and inefficiencies from the cyber incident, whilst pricing measures continue to recover inflation. Adjusted operating profit* was £16.4 million (1H 2022: £18.9 million) with an adjusted operating profit margin* of 17.2% (1H 2022: 20.7%). 

Molten Metal Systems

Revenue for the Molten Metal Systems global business unit for the six months ended 30 June 2023 was £26.1 million, representing a decrease of (7.1)% compared with £28.1 million in 1H 2022. On an organic constant-currency* basis, year-on-year revenue decreased by (8.4)% with driven by weakness in metals markets and the impact of the cyber incident, partially offset by pricing.  

Operating profit for the six months ended 30 June 2023 was £1.8 million (1H 2022: £4.1 million) with an operating profit margin of 6.9% (1H 2022: 14.6%), with the lower margin due to the drop through of volume reduction and inefficiencies from the cyber incident. Adjusted operating profit* was £1.9 million (1H 2022: £4.2 million) with an adjusted operating profit margin* of 7.3% (1H 2022: 14.9%).

Seals and Bearings

Revenue for the Seals and Bearings global business unit for the six months ended 30 June 2023 was £72.8 million, representing an increase of 1.4% compared with £71.8 million in 1H 2022, with the ceramic armour sales declining slightly to £11.4 million in the first half (1H 2022: £12.0 million). On an organic constant-currency* basis year-on-year revenue decreased by (1.6)%, with weakness in industrial markets and the impact of the cyber incident, partially offset by pricing.

Operating profit for the six months ended 30 June 2023 was £5.4 million (1H 2022: £10.5 million) with an operating profit margin of 7.4% (1H 2022: 14.6%), with the lower margin driven by the volume reduction and inefficiencies from the cyber incident. Adjusted operating profit* was £5.9 million (1H 2022: £10.9 million) with an adjusted operating profit margin* of 8.1% (1H 2022: 15.2%).

Technical Ceramics

Revenue for the Technical Ceramics global business unit for the six months ended 30 June 2023 was £154.3 million, an increase of 11.4% compared with £138.5 million in 1H 2022. On an organic constant-currency* basis, year-on-year revenue increased by 7.1%, with growth in our semiconductor industrial, defence and aerospace market segments.

Operating profit for the six months ended 30 June 2023 was £15.4 million (1H 2022: £18.2 million) with an operating profit margin of 10.0% (1H 2022: 13.1%), with margin reduction from inefficiencies resulting from the cyber incident. Adjusted operating profit* was £14.8 million (1H 2022: £18.8 million) with an adjusted operating profit margin* of 9.6% (1H 2022: 13.6%).

Group financial review

Group revenue for the six months ended 30 June 2023 was £553.9 million (1H 2022: £530.2 million), an increase of 4.5% on a reported basis compared with 1H 2022. On an organic constant-currency* basis revenue increased by 2.6%.

Group adjusted operating profit* for the six months ended 30 June 2023 was £50.0 million (1H 2022: £72.5 million). Adjusted operating profit margin* was 9.0%, compared with 13.7% for 1H 2022.

Specific adjusting items before tax for the six months ended 30 June 2023 totalled £13.4 million. See Note 3 of the condensed consolidated financial statements on page 32, for additional information. For the full year ending 31 December 2023, we expect to incur specific adjusting items of around £15 million in relation to the cyber incident.

Operating profit for the six months ended 30 June 2023 was £34.5 million (1H 2022: £70.2 million) and profit before taxation was £28.4 million (1H 2022: £65.7 million), with higher IT costs in the first half as a result of the cyber incident.

The Group amortisation charge for the six months ended 30 June 2023 was £2.1 million (1H 2022: £2.3 million).

The net finance charge for the six months ended 30 June 2023 was £6.1 million (1H 2022: £4.5 million) comprising net bank interest and similar charges of £5.0 million (1H 2022: £2.7 million), net interest on IAS 19 pension obligations of £nil (1H 2022: £0.7 million), and interest expense on lease liabilities of £1.1 million (1H 2022: £1.1 million).

Looking forward to the full year, 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 interest expense on lease liabilities of £2.3 million.

The Group taxation charge for the six months ended 30 June 2023, excluding specific adjusting items, was £11.3 million (1H 2022: £17.7 million), tax on specific adjusting items was a credit of £2.2 million (1H 2022: £nil). The effective tax rate, excluding specific adjusting items, was 27.0% (1H 2022: 27.0%). Note 5 to the condensed consolidated financial statements provides additional information on the Group's tax charge. Looking forward to the full year, we anticipate an effective tax rate around 27.0%.

Adjusted earnings per share* for the six months ended 30 June 2023 was 9.9 pence (1H 2022: 15.9 pence) and basic profit per share from continuing operations was 5.2 pence (1H 2022: 15.1 pence). Details of these calculations can be found in note 7 to the condensed consolidated financial statements.

The Group's balance sheet and liquidity remains robust. Net debt* for the six months ended 30 June 2023 was £257.7 million, with net debt* excluding lease liabilities of £208.5 million. The Group has cash and cash equivalents of £137.5 million, with £39.8 million of its £230.0 million revolving credit facility drawn owing to short term intra group funding needs.

Our key financial covenants are measured on a pre-IFRS 16 Leases basis. As at 30 June 2023, net debt* to EBITDA*, excluding the impact of IFRS 16 Leases, was 1.3 times compared to a covenant not to exceed 3.0 times, and our interest cover excluding the impact of IFRS 16 Leases was 20.3 times, compared to a covenant to exceed 4.0 times.

Acquisitions, divestments and business exits

There were no acquisitions, divestments or business exits in the six months to 30 June 2023 or the six months to 30 June 2022.

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 the specific adjusting items arising during the comparative period are given in note 3 to the condensed consolidated financial statements.

2023

Cyber incident recovery costs and charges

As disclosed in the 2022 Annual Report, the Group experienced a cyber security incident in January 2023. £11.2 million was incurred during the six months to June 2023 relating to system recovery and specialist support costs and £0.8 million of leased and owned IT assets which were impacted by the incident were impaired.

Business closure and exit costs

In July 2023, the Board of our joint venture in Dalian, China made the decision to liquidate the entity as the joint venture agreement is due to expire in August 2023. A £1.8 million charge associated with the liquidation costs has been recognised, mainly in relation to severance costs, costs of dismantling equipment and advisor fees.

Restructuring credit

The Group recognised a £0.4 million credit relating mainly to the partial release of a provision following final settlement of the US multi-employer pension plan for our Technical Ceramics, Ceramics Cores site which was closed in 2021.

2022

There were no specific adjusting items in the six months to 30 June 2022.

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 1H 2023 revenue and adjusted operating profit* if the actual reported results, calculated using 1H 2023 average exchange rates were restated for GBP weakening by 10 cents against US dollar 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 43, reconciliations of the statutory results to the adjusted measures can be found on pages 16 to 20.

Cash flow

1. Definitions of these non-GAAP measures can be found in the glossary of terms on page 43, reconciliations of the statutory results to the adjusted measures can be found on pages 16 to 20.

Cash generated from continuing operations for the six months ended 30 June 2023 was £12.9 million (1H 2022: £45.2 million). Working capital increased by £45.2 million as a result of an increase in receivables of £34.3 million and other working capital of £10.9 million. The increase in working capital reflects temporary growth in receivables which arose as a result of the cyber incident and an increase in safety stocks held to protect against production delays. This will reverse by the year end.

Free cash flow before acquisitions, disposals and dividends* was £(37.1) million (1H 2022: £(1.0) million).

Net debt* for the six months ended 30 June 2023 was £257.7 million (1H 2022: £128.5 million), representing a net debt* to EBITDA* ratio of 1.5 times (1H 2022: 0.7 times).

Net debt* for the six months ended 30 June 2023 excluding lease liabilities was £208.5 million (1H 2022: £76.3 million), representing a net debt* to EBITDA* ratio excluding the impact of IFRS 16 Leases of 1.3 times (1H 2022: 0.5 times).

Further information on the Group's net debt* is provided in note 10 to the condensed consolidated financial statements.

Defined benefit pension plans

The Group pension deficit for the six months ended 30 June 2023 has increased by £3.6 million since 31 December 2022 to £19.2 million on an IAS 19 (revised) basis, with UK discount rates increasing as a result of an increase in corporate bond yields, whilst the US, Eurozone and the Rest of World discount rates have remained stable:

· The UK schemes surplus decreased by £6.2 million to £19.0 million (FY 2022: surplus £25.2 million; 1H 2022: deficit £30.4 million), (discount rate 1H 2023: 5.26%; FY 2022: 4.81%; 1H 2022: 3.86%).

· The US schemes deficit decreased by £2.3 million to £6.9 million (FY 2022: £9.2 million; 1H 2022: £8.2 million), (discount rate 1H 2023: 4.93%; FY 2022: 4.99%; 1H 2022: 4.52%).

· The European schemes deficit decreased by £0.6 million to £27.3 million (FY 2022: £27.9 million; 1H 2022: £29.8 million), (discount rate 1H 2023: 3.70%; FY 2022: 3.70%; 1H 2022: 3.00%).

· The Rest of World schemes deficit increased by £0.3 million to £4.0 million (FY 2022: £3.7 million; 1H 2022: £5.1 million), (discount rate 1H 2023: 5.30%; FY 2022: 5.30%; 1H 2022: 2.90%).

Note 12 to the condensed consolidated financial statements provides additional information on the Group's pension plans.

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. As a result, no further contributions to the UK Schemes are expected to be required pending the results of the next full valuations as at 31 March 2025.

Interim dividend

The Board has resolved to pay an interim dividend of 5.3 pence per Ordinary share. The interim dividend will be paid on 17 November 2023 to Ordinary shareholders on the register of members at the close of trading on 27 October 2023. The ex-dividend date will be 26 October 2023. This compares to an interim dividend paid in the fourth quarter of 2022 of 5.3 pence per Ordinary share.

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, internal 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 principal 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 2022 Annual Report and Accounts, which are available on the Group's website at www.morganadvancedmaterials.com

The following are the Group's principal risks and uncertainties:

· Technical leadershipThe Group's strategic success depends on maintaining and developing its technical leadership in materials science over its competitors. Unforeseen or unmitigated technology obsolescence, the emergence of competing technologies, the loss of control of proprietary technology or the loss of intellectual property/ know-how or inability to recruit, retain and develop the right people would negatively impact the Group's ability to achieve its strategic goals.

· Operational execution/organisational changeAs part of the Group's strategy to improve the efficiency of its operations and organisation, various changes have been made to operational processes at individual sites and to the Group's structure. Further improvements and changes are planned for future years. Failure to manage these changes adequately could result in interruption to operations or customer service, or a failure to maximise the Group's opportunities.

· Portfolio managementFailure to manage the Group's portfolio of businesses proactively and in line with this technology profile could lead to the value of the Group's businesses being eroded over time or to a failure to exploit opportunities to acquire businesses with the capability to add further value to the Group.

· Macro-economic and political environmentThe Group operates in a range of markets and geographies around the world and could be affected by political, economic, social or regulatory developments or instability, for example an economic slowdown or issues stemming from oil and natural resource price shocks.

· Environment, health and safetyThe Group operates a number of manufacturing facilities around the world. A failure in the Group's EHS procedures could lead to environmental damage or to injury or death of employees or third parties, with a consequential impact on operations and increased risk of regulatory or legal action being taken against the Group.

· Pandemic

The overall risk severity has been increased based on assessing a potentially higher impact of a future pandemic. Communicable disease impacts ways of working, the supply chain and the ability of employees to travel to work in affected areas. The Company's priority is to take all actions and precautions necessary to ensure the safety and wellbeing of our employees.

· Climate Change

Global climate change poses short-term and longer-term challenges for our business. The expected changes are far-reaching and difficult to reverse.

· Product quality, safety and liabilityProducts used in applications for which they were not intended or inadequate quality control/ over commitment on customer specifications could result in products not meeting customer requirements, which could in turn lead to significant liabilities and reputational damage.

· IT & cyber securityThe global regulatory compliance landscape, including export regulations, continues to mature and add complexity to how we process, store and share internal and external data on a global level within the Group, failure adds significant risk to the GBUs and the Company. Key business system failure might impact the ability of the business to deliver on its strategic goals. Following the cyber incident experienced in January 2023, the Group's security and monitoring programme has been expedited.

· Supply chain and business continuityThe Group has a number of potential single-point exposure risks. These include:

Single-point supplier: a significant interruption of internal or external key supply could impact business continuity.Single-point site: a key site exposed to a strike, a natural catastrophe or a serious incident, such as fire, could impact business continuity.

· TreasuryThe Group's global reach means that it is exposed to uncertainties in the financial markets, the fiscal jurisdictions where it operates, and the banking sector. These heighten the Group's funding, foreign exchange, tax, interest rate, credit and liquidity risks as well as the risk that a bank failure could impact the Group's cash.

· Pension fundingThe Group sponsors several defined benefit pension arrangements, whose liabilities are subject to fluctuating interest rates, investment values and inflation. This coupled with the increased longevity of members and a tougher regulatory funding regime can result in increased funding burdens on the Group in the future.

· TaxThe Group operates in many jurisdictions around the world and could be affected by changes in tax laws and regulations within the complex international tax environment.

· Contract managementAs a global advanced materials business supplying components into critical applications, the Group may be exposed to liabilities arising from the use of its products.

· Compliance A failure to comply with any applicable laws/regulations could result in civil or criminal liabilities and/or individual or corporate fines and could also result in debarment from government-related contracts or rejection by financial market counterparties and reputational damage.

Going concern

The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the 2022 Annual Report and Accounts on pages 2 to 47. The financial position of the Group, its cash flows, liquidity position and borrowing facilities, are described earlier in this Financial Review. In addition, note 11 to the condensed consolidated financial statements for the six months ended 30 June 2023 provides details of the Group's policies and processes for managing financial risk, details of its financial instruments and hedging activities and details of its exposures to credit risk and liquidity risk.

The Group meets its day-to-day working capital requirements through local banking arrangements underpinned by the Group's £230.0 million unsecured multi-currency revolving credit facility, which matures in November 2027. As at 30 June 2023 the Group had both significant available liquidity and headroom on its covenants. Total committed borrowing facilities were £529.3 million, representing an increase of £111.0 million from 31 December 2022 following the issue of three US Private Placements and a Schuldschein in H1 2023. The amount drawn under these facilities was £339.1 million, which together with net cash and cash equivalents of £130.3 million, gave total headroom of £320.5 million. The multi-currency revolving credit facility was £39.8 million drawn. Total committed borrowing facilities are expected to decrease to £496.0 million by the end of the year due to the maturity of £33.4 million of senior notes in October 2023.

The principal borrowing facilities are subject to covenants that are measured semi-annually in June and December, being net debt* to EBITDA*, excluding the impact of IFRS 16 Leases, of a maximum of 3 times and interest cover of a minimum of 4 times, based on measures defined in the facilities agreements which are adjusted from the equivalent IFRS amounts.

The Group has carefully modelled its cash flow outlook, taking account of reasonably possible changes in trading performance, exchange rates and plausible downside scenarios, including the impact of cyber security incident on 2023 cashflows. This review indicated that there was sufficient headroom and liquidity for the business to continue for the 18-month period based on the facilities available. The Group was also expected to be in compliance with the required covenants discussed above.

The Board has also reviewed the Group's reverse stress testing performed to demonstrate how much headroom is available on covenant levels in respect of changes in net debt*, EBITDA*, and underlying revenue*. Based on this assessment, a combined reduction in EBITDA* of 37% and an increase in net debt* of 40% would still allow the Group to operate within its financial covenants. The Directors do not consider either of these scenarios to be plausible given the diversity of the Group's end markets and its broad manufacturing base.

The Board and Executive Committee have regular reporting and review processes in place in order to closely monitor the ongoing operational and financial performance of the Group. As part of the ongoing risk management process, principal and emerging risks are identified and reviewed on a regular basis. In addition, the Directors have assessed the risk of climate change and do not consider that it will impact the Group's ability to operate as a going concern for the period under consideration.

The Board fully recognises the challenges that lie ahead but, after making enquiries, and in the absence of any material uncertainties, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for a period of 18 months from the date of signing this half-yearly report. Accordingly, they continue to adopt the going concern basis in preparing the condensed consolidated financial statements for the six months ended 30 June 2023.

Directors' Responsibility Statement

The Directors confirm that to the best of their knowledge:

· The condensed consolidated financial statements have been prepared in accordance with UK-adopted IAS 34 Interim Financial Reporting;

· The interim management report for the six-month period ended 30 June 2023 includes a fair review of the information required by DTR 4.2.7R (indication of important events and their impact during the first six months of the financial year and a description of the principal risks and uncertainties for the remaining six months of the year); and

· The interim management report for the six-month period ended 30 June 2023 includes a fair review of the information required by DTR 4.2.8R (disclosure of related parties' transactions and changes therein).

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

By order of the Board

Pete Raby

Chief Executive Officer

Richard Armitage

Chief Financial Officer

3 August 2023

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 6, 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 as the charge arises primarily on externally acquired intangible assets since the adoption of IFRS and does not therefore reflect all intangible assets consistently.

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 impacts. 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 operating review on pages 6 to 11.

Year-on-year movements in segment revenue

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

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, these covenants use EBITDA on a pre-IFRS 16 Leases 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 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 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 Group adjusted operating profit (operating profit excluding specific adjusting items and amortisation of intangible assets) divided by the year-on-year average adjusted net assets (excludes long-term employee benefits, deferred tax assets and liabilities, current tax receivable and payable, non-current other receivables, non-trade payables, provisions, cash and cash equivalents, borrowings, bank overdrafts, derivative financial assets and liabilities, and lease liabilities).

1. The return on invested capital calculation has been simplified so that it can be calculated from published information; the prior period comparative has also been restated. Under the previous methodology (which used 12-month adjusted operating profit and 12-month average adjusted net assets), ROIC as at 30 June 2023 was 18.1% (30 June 2022: 22.8%).

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 7 to the condensed consolidated financial statements.

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.

Interim Results Announcement

Condensed Consolidated Financial Statements

for the six months ended 30 June 2023

Condensed consolidated income statement

1. Details of specific adjusting items are given in note 3 to the condensed consolidated financial statements.

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

Interim Results Announcement

Condensed Consolidated Financial Statements (continued)

for the six months ended 30 June 2023

Condensed consolidated statement of comprehensive income

Condensed consolidated balance sheet

Condensed consolidated statement of changes in equity