Morgan Advanced Materials (LSE:MGAM) — Half Year Results

0:00 Good afternoon, and welcome to the MORGAN ADVANCED MATERIALS PLC Investor Presentation. Before we begin, I would like to submit the following poll. And I would now like to hand you over to your CEO, Damian Kaby. Good afternoon. Good afternoon, everybody. I'm Damian Kaby. I'm the CEO of MORGAN ADVANCED MATERIALS, and I'm joined today on this call by Richard Armitage, Rizal's CFO. I'm very pleased today to introduce you to MORGAN ADVANCED MATERIALS, and then let Richard walk you through the our interim results, which we presented a couple of weeks ago.

0:54 By the introduction about MORGAN. MORGAN is global leader in advanced materials. We have a turnover of approximately £1,000,000,000 It's a large network of 56, 57 sites, approximately 8,000 employees. And what are our core capabilities as a business, which are the core capabilities that we are very well known and sought after, are material science, around two materials of ceramics and graphite and carbon, a deep application expertise in the use of these materials, and then codesign and manufacturing excellence.

1:40 And in general, and in specifics, our customers trust us to supply mission critical solutions. The backbone of our business is our three divisions. They are the backbone of our operating model as well. They are aligned with specific versatile materials, as I said, ceramics on the one hand and graphite and carbon on the other one. These materials are very versatile because the way we operate and the way we operate, the way we use them is the way that we formulate them, we process them, and we tune not only their shape, but also their physical and chemical characteristics, their porosity, electrical conductivity, their hardness, their persistence to mechanical stress, and many other physical properties.

2:34 These products are typically higher performing than metals or polymers. And that leads us to supply around 3,000 combination of materials and applications. As you can imagine, the diversity of these applications and these materials makes that it's very important to be agile and to have a strong customer intimacy in this business. And that's why our three divisions are so core to our operating model because they help us they enable us to have a short operational decision making process and to be close to our market and our customers. You can see on the next slide our key markets.

3:20 And you can see that another strength of MORGAN is the diversification that we have across different end markets. You can see that the top two the two largest markets for us are industrial processes. By this, we need chemical processes, manufacturing processes for ceramics, for glass and aerospace and defense, which has progressively grown into being close to our largest market. What this means is that overall, 40% of our business is exposed to what we call the manufacturing investment cycles. When you are into process industries, you sell into parts and equipment insulation typically that are used in these processes, and they are not the use or the demand for these products is not proportional to the production of these industries, but more to their investment cycle. They need they are tied to replacement and to new builds.

4:26 In the case of aerospace and defense, similarly, we have an important part of our business that is dependent on the use of the aircraft as opposed to newbuilds of aircraft. Another characteristic of our business that's also implicitly visible in this chart is that we don't have we're not dependent on one single large customer. In fact, our largest customer represents less than 3% of group revenue. So with these generally attractive end markets, these very strong capacity differentiating capabilities, we believe that this business has a very strong potential. And our strategy is called unlocking our potential.

5:14 It is founded on three levers, which are displayed here: transforming operational effectiveness, where we are continuing to proceed with continuous improvement, which has been a significant factor of this business. We've demonstrated over and over and over the years a capability to deliver continuous improvements to our processes. But we've decided not to move beyond that by addressing large underperforming sites and by leveraging the group scale for procurement. As you can imagine, a bit of a drawback from a business like ours, where you really highly the operating model relies on operating divisions is that the group scale is not always used leverage to its best capability, and we are progressing with leveraging the scale of the business for procurement as well as back office efficiencies and enhancing our business analytics through the implementation of an ERP and multiple data analytics systems.

6:24 The second big driver big lever that we have strategic lever is to drive stronger growth. We are making sure that we are focusing on specific segments where we have a strong right to win by developing partnerships along the value chain with original equipment manufacturers, but also with users, with operators who use our products. And we also focusing on expanding the share of the value that we go after, the share of the value chains. We've also, as part of this strategic lever, determined that there is areas where we can invest in capacity to fulfill multiyear contracts and to, in a bite sized way, increase our revenue.

7:13 The last lever or the third lever is maximizing more portfolio value, which consists of two things, is expanding our approach and our openness to partnerships, so looking for partnerships across the value chains where we play, and reviewing our business portfolio, one of the important pieces of it being the announcement of a strategic review of our Thermal Products division, which we announced at the beginning of the year. That brings us to a clear roadmap, which consists in the midterm of benefiting from the initiatives which I've described before, which are entirely in our gift to execute.

8:00 I'm talking about leveraging the group scale, I'm talking about digitalization, efficiency gains, turning around some underperforming sites, a bit of contribution from market growth, but not much. We didn't want our we don't really want our road map to be dependent on revenue growth or market growth. These three actions combined will give us the opportunity to target a 12% margin by 2028, which we have confirmed recently we're making good progress on. And beyond that, we are targeting to reach 14% as we build our leadership positions and expand into adjacencies, deepen our positions in value chains and in portfolio management.

8:50 I will now turn to Richard to introduce the sorry, we're progressing, as you can see here on this slide, very well at pace on all these different levers. We have we're progressing on two large site turnarounds. The first was we launched last year. The second one consists of a shutdown of the site in which we announced in March this year. We're also very confident that we will be able to fully deploy our group procurement approach and embed category management by the end of the year. We've also established focused teams in drive growth, to accelerate in certain key markets.

9:37 And as far as the maximization of the portfolio is concerned, we have undertaking the strategic review, which is progressing at that pace. This is now I felt that before I hand over to Richard to present some the results of the first half, it would be good to illustrate this drive growth by recent examples of achievements in that area. And these are both things that are the result of some of the focus that we put as well as the result of some successful initiatives that were launched before we implemented this strategy that give us strong confidence that the approach works.

10:30 In the area of energy storage, we've gained a significant share recently at one of the leading manufacturers of static battery storage by providing an alternative to an existing insulation product with a product that has a much better cost performance ratio, so not in kind, but with products that's mobilized our engineering capabilities in insulation and gives us access to a growing market with a differentiated product and essentially gaining share in a market that's growing. In the case of wind, similarly, by combining our partnerships with manufacturing of gas manufacturers of wind turbines and strong commercial action with the operators of these wind turbines, we've been able to be specked in, in some of the original designs, but also be an important player in the replacement part.

11:31 Over the past six months, we've gained share at three of the large operators through a product that has a differentiated capability to be more energy efficient, to have a better electrical performance, but also a longer, more resilient, longer reliability in the system. And as you can imagine, the cost to maintain these equipments when you have to climb up the pole, sometimes go on a boat to go and climb up the pole are quite significant as compared to the cost of the part that you have to replace. And finally, in the case of rail, we're also gaining share by with a partnership with one of the leading constructor of locomotives as well as by an increased commercial action, especially in Asia, where we've gained share with a few of these operators.

12:25 So you see how this action along the value chain is combining the pull and the push or the push and the pull is particularly successful and creates opportunities for us to drive growth as opposed to grow with our markets, which, in many cases, are attractive to begin with, but we want to grow faster than our end markets. I'll now hand over to Richard to go over the financial performance for the first half. Thank you, Damian. Good afternoon, everybody. I'm Richard Armitage. I'm the CFO of MORGAN. I'm just going to give you a brief, update on our financial results for the first half. So starting with the overall performance, our revenue was £518,000,000 which was an increase of 4.8 on a constant currency basis, driven by growth from our aerospace and energy end markets.

13:25 There is, in our first half results, a phasing benefit of £8,900,000 I can describe later what that is, if necessary, resulting from a take or pay arrangement with one of our semiconductor customers. That will not repeat in the second half. Therefore, if we exclude this phasing benefit, revenue grew by 3% on a constant currency basis. Group headline adjusted operating profit was $57,800,000 which gives an adjusted operating profit margin of 11.2%. This was also affected by the take or pay item of £8,900,000 Without that, operating margin would have been 9.6%. Return on invested capital was 14.5%, which is slightly below our through cycle range of 17 to 20%, but it is on an improving trajectory.

14:21 Free cash flow saw an inflow of 3,500,000, broadly in line with the first half of twenty twenty five and reflecting the investments we continue to make into the group, particularly in the first half in our ERP program. Adjusted EPS was 10.7p per share. We have held our interim dividend flat at 5.4p per share. Specific adjusting items amounted to £18,400,000 for the half and driven primarily by expenditure on our ERP system. Let me now turn to a profit bridge to try and illustrate a little bit more what's happening with our margin. Firstly, we've shown on the left hand side of the chart the movement from the first half of last year to the second.

15:09 What you can see is that this is driven firstly by a number of one off items that did not repeat in the second half, but principally, the reduction in margin was driven by volume and mix, where we saw a sharp decline in the second half in demand from industrial markets as well as declines in revenue from armor, semiconductor and health care that affected our margin mix. Going from the second half of last year to the first half of this year, we can see a very solid improvement, driven by a two fifty basis point contribution from efficiency and simplification programs, which substantially reversed the decline that we saw in the second half of last year.

15:56 We did have some short term operational issues that affected our margin in the first half, primarily in our Thermal Products business. Those products have been those problems have been substantially addressed, and we're now seeing an improvement in those operations. I would also note that we have successfully offset inflation through pricing of around 2%, as is our usual practice. And then finally, the payment under the take or pay agreement added 160 basis points to margin, excluding this operating margin in our first half would have been 9.6, which I'm sure you'll appreciate is a significant improvement over the second half of last year. That is a result that gives us confidence in being able to make further progress towards our target of 12% margin by 2028 per the chart that Damian showed you just now.

16:54 Moving on to leverage and cash flow. I would firstly note that working capital showed an outflow of 23,500,000 during the period. This is quite normal for us. We tend to see an outflow of about £20,000,000 in the first half, and we expect most of that to reverse in the second. Net capital expenditure amounted to 12,500,000, significantly lower than the prior year as our investment in semiconductor capacity came to an end and due to the phasing of spend on certain projects. We expect to spend around £50,000,000 in total during 2026. Exceptional items totaled £15,200,000 comprised of £11,500,000 of costs associated with our ERP rollout and £5,300,000 of costs associated with restructuring, offset by $1,600,000 of gains associated with our shareholding in Faseko India.

17:53 Free cash flow was therefore an inflow of 3,500,000 Net debt finished at GBP $253,000,000, excluding lease liabilities, in line with our expectations and representing 2x EBITDA. We anticipate that leverage will improve during the second half as free cash flow continues to normalize and as we realize the proceeds from our disposal of the MMS business. As a result of this, we expect year end leverage to be around 1.7x. Just gonna give a reminder of our capital allocation policy. So firstly, our target leverage remains in the one to one and a half times range in relation to ongoing operations, which we will make progress towards reaching over the next twelve months.

18:45 As before, once our leverage is within this range, we will consider a temporary increase into the one and a half to two times range in the event of a compelling acquisition. Whilst capital investment remains a priority to support organic growth opportunities, we foresee limited needs for capacity investment and expect to be able to maintain overall CapEx at around £50,000,000 or 1.2x depreciation for the next three years. We will maintain the dividend for now, then grow it in line with adjusted earnings once cover returns to around 2.5x. Once stabilized, we will consider the need to fund inorganic investment alongside additional returns to shareholders. The Board will review the situation regularly, recognizing the opportunity that additional returns present to return cash to to shareholders and enhance margins.

19:39 Just finally, on our outlook. We are mindful that the current geopolitical and macroeconomic environment, particularly within European industrial markets. We therefore expect organic constant currency revenue growth of around 2% for the full year. Noting also a headwind due to foreign exchange, we expect an adjusted operating profit margin for the second half broadly in line with that of the first, excluding the £8,900,000 phasing benefit from the take or pay agreement. So that's my update. We would now be delighted to take any questions. And maybe, Richard, let me start with the first two questions that are in the chat, and then I'll hand over for the next to you to both for the next two, if that's all right.

20:34 The first question is a question around aerospace. And it says aerospace appears to be one of the strongest areas in the portfolio. How much visibility do you have on aerospace demand over the coming two, three years? And are you seeing any constraints around capacity? So yes, indeed, aerospace is an important part of our business today. It's also seen as Richard just described a significant increase year on year. It's been growing for the past few years. We do have visibility on the orders because of the natural nature of these orders that typically come with up to twelve months anticipation, but also through our contacts and partnerships in the value chain. We also have a view of the order book of our users of of the customers and our customers' customers.

21:35 So right now, as I'm sure most of the people who are familiar with this industry know there is a significant demand and a pent up demand in the civil aviation environment. We're seeing customers and customers' customers approaching us to make sure that the capacity is there that we can support their growth, especially in the area of engine manufacturing. A lot of the larger engine manufacturers are actually struggling in their supply chain, not because of their own capabilities, but because of the capacities of their suppliers. So for us, it's really a good opportunity to strengthen our partnerships to make sure that we can be there for their demand. And we are investing. It's one of the investments that I mentioned about bite size capacity increments is actually in preparation for the demand that we see coming. We are not capacity constrained at this time, but we're making sure that we can continue to grow with our customers and that we can be ready on time when their own demand increases.

22:43 The second question is where would you see the most attractive bolt on M and A opportunities? So I'm not going to be specific in this because we haven't been specific publicly, but I'll maybe explain a little bit how we approach this. So we are looking for bolt on capacity, on M and As that will help us either accelerate our penetration in applications, functionalities where we see opportunity, our products and our technologies play, but where our presence in certain markets may not be as strong as we would wish or as opportunity to expand in the along the value chain where we play.

23:30 We are in a very diverse environment. There is quite a few large small to midsize opportunities for us to expand. We have a very systematic, very programmatic approach to identifying, approaching and stop and nurturing these opportunities. Obviously, we're very selective and very rigorous in this approach, And we're also managing that together with the progress of the evolution of our portfolio. The if it was going to be decided, the divestiture of our Thermal Products division would expand our ability to fund these types of inorganic moves.

24:24 If it's for you, Richard, to answer the next two questions. Yes. Thank you, Damian. So the next one is what gives us confidence in achieving 12% margins by 2028. So we set the target when our run rate and margin was about 9%, so you can think about this as a progression from 9% to 12% driven by three courses of action roughly in equal proportions. The first was site profit improvement plans that Damien has referred to. So this is a number of sites that have the opportunity to significantly improve their rate of profitability.

25:10 Two of these have been actioned already, and we have two more to work on. And we're confident that we will be executing plans at all of those sites that will contribute that part of our margin improvement. Secondly, procurement and other related actions that the group has not addressed before where we think there is significant profit improvement opportunity. And in the case of procurement, that is about leveraging our scale to purchase key items across the group and therefore generate value. And then the third one was an assumption of revenue growth, but we really only assumed across this period, you know, maybe 2% revenue growth or so because we were not relying on a market recovery to get back to that 12% margin. Now there may well be a market recovery. That may well be very helpful, but we wanted to get back to that 12% level primarily through our own self help. So those are the things that drive the market improvement.

26:19 Sorry. The margin improvement. I think the next question I have is why are you undertaking a strategic review of thermal products, and what do we make what progress are we making? We have and and if you look at our website, there is a presentation from our December 2025 Capital Markets event where we set out the financial framework for the business and for our individual businesses. And and it's clear there that Thermal Ceramics, whilst being a very good quality business, it has growth opportunities, it has the opportunity to expand its operating margin, has lower growth and lower margin opportunities than the other two businesses.

27:08 And, therefore, we have to go through the thought process as to whether there would be a better owner of Thermal Ceramics, an owner that may well have other similar businesses, that would be in a better place to invest in the business' growth and ultimately accelerate the achievement of of that business plan. So that's why we launched a strategic review. We are making good progress. We are having to examine in detail all aspects of the options for, for the business, what would happen if we retain it and grow it, and equally, what would happen if we sell it. And if we were to sell it, we are going through a review of legal matters, environmental matters, tax matters, as you might imagine, thinking about the valuation of business and, evaluating whether there could be buyers of the business.

28:05 That is a lot of work to do. It is progressing very well, and we will, make a decision as to what is the next step and announce that decision as soon as we are able. I think, Damian, back to you for the next question or two. Yes. Certainly, I'll take the next two and then back to you after that, Richard. So the next question is around is a follow-up question on wind. And you are outperforming the marketed wind and have reported significant growth. What is next? And how are you planning on capturing this opportunity? So it is true that we are growing faster than market and we've been growing faster than market in wind. And it is really for us, we see an opportunity to gain share by, as I mentioned, positioning products with higher performance and higher lower maintenance requirements.

29:06 The approach to this is to combine, as I mentioned, the focus that we put on OEM and to make sure that we are in the first manufacturing, the first amount of these turbines, but also get generate some pool from the operators. And here, this is really a very strong commercial approach where we are approaching the different operators of this turbine and making sure that the value that we propose is being represented. So we have a very focused, dedicated team that's working on increasing their share of this market and growing faster than the market.

29:53 The next question was, where are you seeing the strongest pricing power in your portfolio? And I'll answer this by saying that overall, we have good pricing power, and we've had consistently good pricing power. If you go back several years, we've always, through COVID, post COVID, inflation periods, less inflation periods being able to with combination of pricing and continuous improvements that I mentioned to more than compensate the impact of inflation. And that applies to all of our businesses, to be honest. So there is obviously sometimes in some parts of the business basis, but the situation is a bit more difficult.

30:46 But I think really important message here to remind, if you remember is that this is a business with good, solid, demonstrated continuing pricing power. Typically, it takes an effort to be qualified in the application where we play. But then we have a significant strategic moat where the effort to requalify somebody else is quite large. The cost sometimes, including in sometimes can be is quite large and sometimes very large. So you end up more playing if you abuse your pricing power, playing your chances on the next generation, then you really play your chances on this very specific supply that you provide.

31:32 So the qualification is important, the effort to requalify, sometimes the certification that comes with it. And another important part of our strategic note that doesn't apply to all our business, but a significant portion is the fact that we tend to be in places where there is a certain level of sovereignty that's attached to the product, obviously, in defense, but also in semiconductors and, to some extent, in civil aviation. Back to you, Richard. So question around margins. So how expect to maintain the underlying adjusted operating margin in H2 as the 160 basis points benefit from the GBP 8,900,000 semiconductor payment falls away? And what are the key operational drivers supporting that performance? That's a good question.

32:21 So to recap, excluding the semiconductor item, our margin in the first half was 9.6%. We expect a margin of about the same in the second half. To a degree, we we kind of need to repeat the first half, so we're not expecting to have a materially different level of sort of revenue or underlying performance. But I think the one thing that will help in particular is we did have, as we said, operational issues within thermal ceramics in the first half. Those are being progressively worked upon, and we expect a better performance in the second.

33:06 And then, you know, things like efficiencies and other savings programs, you know, they continue. So we're likely to do a little bit better in the second half than we did in the first. So nothing dramatic, but those sort of improvements will help our margin in the second half. That's great, Richard. Damien, if I may just jump back in there, and thank you for addressing those questions for investors today. But, Damien, before we direct investors to provide you with a feedback, which I know is particularly important to yourself and the company, could I please just ask you for a few closing comments? Yes, absolutely. So I mean, essentially, the various four points that I'd like you to remember from today is the fact that, first, we have a clear plan to achieve our 12% growth target in 2028.

34:02 We are on track to achieve this. We're seeing significant progress in all the levers, including improvement of our revenue, including encouraging progress in all the growth areas that we've selected, including progress on the site turnaround that we selected as well as in the establishment of our procurement initiative procurement organization. We've also progressed with the implementation of an ERP, which is a third complete as of the end of July, which will which has been progressing as expected, so we can see how the different parts of our strategic direction are coming together.

34:54 The ambition the agenda is ambitious, but the MORGAN team has really embraced it. There's strong energy, strong engagement, which is also reflected in our recent engagement survey. And we are very confident in our ability to transform, drive and maximize the portfolio, get to the 12% margin target by 2028 and fourteen percent beyond. Thank you very much for your interest and your questions today. Fantastic. Damien, Richard, thank you once again for updating investors today. Could I please ask investors not to close this session as you now be automatically redirected to provide your feedback, which will help the company better understand your views and expectations. On behalf of the management team, we'd like to thank you for attending today's presentation, and good afternoon to you.