Morgan Advanced Materials plc (MGAM) Earnings Call Transcript & Summary

Welcome to the Morgan Advanced Materials Financial Results 2023 conference call. My name is Adam and I will be your operator today. [Operator Instructions] I will now hand the floor over to Pete Raby to begin. So Pete, please go ahead when you are ready.

Good morning, everyone. I'm Pete Raby, the Chief Executive of Morgan Advanced Materials. I'm joined on the call by Richard Armitage, our CFO. I'm going to say a few words of introduction. Richard will then take you through our prelim results for 2022, and I will then talk through our growth drivers, our business unit performance, progress against our ESG priorities and our outlook for the full year. Starting with the highlights. We've delivered strong organic revenue growth of 11.2%. Our faster-growing markets delivered 11.7% growth and our core 11.1% growth. A good performance in the core, reflecting further recovery of some markets in the pandemic and our focus on new products driving share wins. We've experienced higher inflation during the year as we expected, and we pass that on to our customers with higher pricing. The impact of pricing and continuous improvement activity more than offset the cost inflation that we experienced during the year. With the strong growth in revenues and the benefits of pricing and continuous improvement, operating margins have expanded 50 basis points to 13.6%, and ROIC improved to 22.4%, a very healthy return. Earnings per share of 33.8p, is up 24% on the prior year, and our dividend per share is up 32%. Our balance sheet is strong with net debt-to-EBITDA of 0.8x despite a GBP 67 million contribution to our U.K. pension scheme in the year, eliminating the deficit and substantially derisking our U.K. defined benefit schemes. We've also made further progress in reducing our Scope 1 and Scope 2 emissions with an 8% reduction compared to the prior year. I'm very pleased with the further progress that we have demonstrated during the year. We've delivered strong revenue growth and expand margins as planned in a challenging supply chain and labor environment. Our outlook for the full year is unchanged from the guidance that we provided on the 7th of February. On the 8th of January, we experienced a significant cyber attack on our business. And in response to that, we shut down many of our systems and compartmentalized the network to protect the business. Customer demand has remained robust throughout our recovery. The recovery is progressing well with our ERP system substantially restored. We've also accelerated our IT modernization program which includes changes to our network design and the deployment of additional security tooling and an acceleration of our group ERP program. All of our plants remained operational throughout the period and our employees have been working hard with our customers to deliver the best possible service. We expect exceptional costs in 2023 of around GBP 15 million related to the incident. I'll now hand over to Richard to take us through the financial results.

Thank you, Pete, and good morning, everyone. I would like to start with an overview of the financial results to the 31st of December 2022. Revenue at GBP 1.112 billion was 11.2% higher than prior year on an organic constant currency basis. Group adjusted operating profit was GBP 151 million with operating margin 50 basis points higher at 13.6%. Inflation to date has been recovered in full with further margin expansion achieved through efficiency savings and higher volumes. Cash generated from operations was GBP 59.1 million and free cash flow and outflow of GBP 47 million, both lower than last year due to the one-off pension contribution of GBP 67 million, an increase in capital investment and higher working capital. Adjusted EPS was 24.3% higher at 33.8p per share, reflecting the higher operating profit and net financing costs that were in line with last year. The proposed final dividend is 6.7p per share, resulting in a total dividend for the year of 12p. This reflects dividend cover of 2.8x in line with our financial framework, which aims to reduce cover to an average of approximately 2.5x adjusted earnings over the medium term. As usual, we have included in the appendix the financial information in statutory format. There were no significant adjusting items in the period. Turning now to the year-on-year movement in our adjusted operating profit. This chart shows the key drivers. We can see, firstly, the benefit from higher volumes in the year with drop-through of approximately 30% on volume growth, giving a benefit of approximately GBP 14 million. As expected, pricing and efficiency savings have exceeded inflation, helping our margin expansion and giving a benefit of around GBP 9 million. We are benefiting from the final savings from our restructuring program, which overdelivered slightly, giving savings of a little over GBP 3 million for the 2022 full year and of GBP 23 million for the program as a whole. There has also been some investment in additional overheads as expected, particularly in R&D and sales in support of our ongoing growth programs. Finally, we have benefited from a small tailwind from the weakening of sterling, which has improved operating profit by just under GBP 7 million. Moving on to cash flow and notwithstanding our strong EBITDA and balance sheet performance, there are a few points to highlight. We have seen a substantial increase in working capital with an outflow of GBP 44.7 million, driven by several factors. Business growth has added around GBP 15 million, then currency, a further GBP 8 million. Much of the balance is due to an additional increase in inventory in preparation for growth and as a means of supporting our supply chain resilience. Pension payments totaled GBP 85.9 million and include the GBP 67 million one-off contribution that we made to our U.K. pension funds in December. As you will see from our balance sheet, this has left our U.K. funds with a small accounting surplus and a relatively immaterial overall IAS 19 liability. Capital expenditure was in line with expectations at GBP 57.4 million, an increase of GBP 39.3 million compared with the prior year. This included nearly GBP 30 million of investments in new capacity for our faster-growing markets and particularly for semicon. Free cash flow before dividends was therefore an outflow of GBP 47 million for the year. Net cash flows from FX, interest and other items comprised an exchange movement of GBP 14.4 million and net interest payments of GBP 7.8 million. Net debt was GBP 148.5 million, excluding lease liabilities, with net debt-to-EBITDA of 0.8x. We have included our usual summary of our funding profile in the appendix. As announced in December, we did make a one-off contribution to our U.K. pension schemes of GBP 67 million. This has had the short-term benefit of improving our free cash flow from 2023 onwards by GBP 15 million per annum. The trustees have now hedged inflation and interest rate risk fully and reduced investment risk. Leverage on the scheme's LDI portfolio is currently around 1.3x, so prudent and well within guidance from the regulator. As a reminder, the principal benefit from this change will be to reduce substantially potential for volatility in the scheme valuation and in turn reducing the risk of a material new deficit emerging at the March 2025 re-evaluation. And our objective over time remains the full removal of liability to the U.K. schemes by securing the scheme benefits with insurers. On this next chart, I have included an update on our technical guidance for 2023. As you can see, we expect our adjusted effective tax rate to continue to be in the range from 26% to 28% this year. Based on current interest rates, we expect our finance charge to be in the region of GBP 13 million to GBP 15 million, comprising a cash interest charge of around GBP 10 million to GBP 12 million on our net debt, a noncash pensions financing charge of around GBP 0.5 million and around GBP 2 million of interest on our lease liabilities. We expect our cash contributions to our non-U.K. defined benefit schemes to be around GBP 3 million to GBP 4 million, a reduction of CIRCA GBP 15 million compared with last year, with nothing changed in our U.K. schemes. For 2023, we expect capital expenditure to be of the order of GBP 70 million to GBP 80 million, as we invest to support the continued growth in the business. By the end of the year, we expect at least GBP 35 million of the semicon capacity investment of GBP 60 million that we communicated in December, to have been either spent or committed. And our dividend policy, as communicated in December is now to move towards a cover of around 2.5x over the medium term. Finally, I have included here a reminder of our updated financial framework that we introduced at our December 2022 Capital Markets event. We are continuing to accelerate our investment plans to take advantage of the substantial growth opportunities in our end markets, allowing us to deliver 3% to 6% organic growth through the cycle. We expect to return to this level of growth in our second half. In December, we stated our intent for operating margin to be sustained in the 12.5% to 15% range. We made good progress in 2022, achieving 13.6% and would expect to be back in our target range during our second half. Following our excellent return on invested capital outcome in 2022, we would expect our capital investment to have a slight dilutive effect in the short term, but we still expect to sustain it in the target 17% to 20% range, which is well above our cost of capital. We also expect to keep net debt in the 1 to 2x range. Our ambition, therefore, remains to drive enhanced growth in adjusted EPS through accelerated organic revenue growth, a continued focus on margin, accretive M&A, then enhance returns to shareholders as appropriate. That covers the key financial items. So with that, I'll hand you back to Pete.

Thank you, Richard. I will now take you through our growth drivers, the performance of our business units and an update on progress against our ESG goals together with our current positioning and the business outlook. We have leading differentiated positions across our business, which we segment between faster-growing markets and our core. In our faster-growing segments, semiconductors, health care, clean energy and clean transportation, we typically have a smaller share and an emerging position. These markets have good underlying long-term growth drivers, and we expect them to grow more quickly than our core markets over the cycle. We've been investing in capabilities and capacity in these segments in the last 5 years, and we're enjoying share wins and faster growth as a result. By increasing our exposure, we increased the underlying growth rate of the group, incrementally expand our margins to the newer products contribute to the mix and improve the alignment of our portfolio with our purpose, reinforcing our ESG credentials. Our core representing 80% of the business is the more mature markets where we typically enjoy the strong market position, leading or among the leaders. We have a strong brand, well-established and deep customer relationships and a global position. We're continuing to invest in our core to maintain and win share and introducing new technology and new products that our customers need to become more sustainable. Slide 14 shows the organic performance in our major market segments, split between our faster-growing segments and our core. Within our faster-growing segments, semiconductors grew strongly again in 2022, up 37% on the prior year. This reflects both positive market momentum and share wins as a result of our new product and capacity investments. Health care was up 2% with growth in implantable devices and analytic equipment, offset by declines in vacuum insulation for vaccine and medicine transport and storage as expected. Clean Energy & Transportation were down 6%, also as we expected, with the non-repeat of one-off solar projects that were delivered in 2021. Moving to the core. Our industrial sales grew 12% and industrial markets recovered further from the pandemic. Europe and North America were particularly robust, and we also continued to win share. Transportation grew 17% with aerospace the driver as air traffic volumes recovered further. Chemical and petrochemical sales grew 8% with higher thermal project activity and growth in the aftermarket sales for Seals and Bearings products. The robust performance in our core markets shows the strong positions that we have in those segments and the benefits of the focus and the investments that we've made in recent years. Moving to our global business units, I'll start with Thermal Ceramics. Thermal Ceramics revenues grew organically by 11.4% with good growth in all the major industrial markets, further recovery in aerospace and automotive markets and increased project activity in petrochemical applications. We also grew volumes in clean energy applications in North America and Asia. Operating margins improved slightly to 11.6% with our pricing actions offsetting inflation and drop-through on incremental volumes supporting margins. Turning to Molten Metal Systems. Revenues increased organically by 15.8%, with strong demand and share wins in the aluminum segment and growth in copper and precious metals. Margins expanded to 13.5%, reflecting the drop-through on the increased revenues and pricing efficiency actions more than offsetting inflation and investment. In Electrical Carbon, revenues increased 9.7% organically with the main drivers being very strong growth in the semiconductor segment and growth in transportation segments. Margins expanded further to 21% reflecting pricing and continuous improvement actions, but more than offset cost inflation and investments. Moving to Seals and Bearings. Revenues grew organically by 2.8% with a reduction in armour as expected, offset by growth in aerospace and petrochemical. Armour sales for the year was GBP 25.5 million, a GBP 7 million reduction compared to the prior year as those customer programs steadily wind down. Margins declined 12.8%, driven by manufacturing inefficiencies in the second half of the year and a provision for a quality claim within armour customer. Turning to Technical Ceramics. Revenues increased organically by 15.8%, with growth in semiconductor, health care, industrial, defense and aerospace segments. Margins expanded to 14.1%, reflecting the drop-through on the increased revenues and pricing and continuous improvement, more than offsetting cost inflation and investment and the remaining benefits from our restructuring program. This was a very pleasing further step-up in growth in margins in Technical Ceramics and reflects the multiyear focus the team have put on winning new business. I'll now turn to our goals and progress on the environment, social and governance, or ESG, shown here on Slide 20. Our purpose is to use advanced materials to make the world more sustainable and to improve the quality of life. This purpose gone outside our decision-making and strategy, and we deliver on it through the way that we operate and manufacture our products and through the products themselves and the benefits they bring to our customers. We're constantly investing in our manufacturing processes to reduce the environmental impact of our business. In parallel, we're investing in new materials and process technologies that improves the performance of our products and deliver bigger environmental and safety benefits to our customers. We have 5 ESG priorities that we'll be working on, and we set targets for those for 2030. We will reduce our Scope 1 and 2 CO2 emissions by 50% by 2030 from our 2015 baseline as part of our goal to be Scope 1 and 2 net zero by 2050. We're committing to reduce our water consumption overall and in high and extremely high water stress areas by 30% by 2030. We're also determined to provide a safe, fair and inclusive workplace for our people. We've committed to a lost-time accident rate of 0.1 by 2030 against our goal of Zero Harm. We want our workforce to reflect the communities in which we operate, and we set a target of 40% of our leadership population being female by 2030. Finally, we want a welcoming and inclusive environment for our employees where they can grow and thrive. We've set a target of achieving top quartile engagement by 2030. Slide 21 shows our progress in reducing CO2 emissions since 2015. Our CO2 emissions in 2022 were 8% down on the prior year, a good performance with production volumes growing around 8%. We have a broad-based program of improvement underway covering energy procurement, process improvements and behavioral changes in our plants. In 2022, we improved our energy intensity, price adjusted, by around 2% and continued the transition to carbon-free energy for a number of our sites. Around half of our electricity now comes from green or carbon-free sources. Turning to Water, Safety and Diversity on Slide 22. Our water usage is up 12% over 2021 levels driven by the volume growth in the business, changes in mix and some water leakage, partially offset by water efficiency actions. Our water usage is high and extremely high stress areas reduced 2% during the year, with our efficiency benefits more than offsetting volume growth. Looking at safety, we've seen an increase in our lost-time accident rate. That's the number of lost time accidents to 100,000 hours worked. Our rate increased to 0.28, up from 0.22 at the end of 2021. We've completed the deployment of our think state behavioral training for employees, and we're continuing to work very hard on safety. We're reinforcing our training, increasing safety tools, safety discussions and near-miss reporting. And we're conducting detailed root cause analysis of lost time accidents and significant near-misses. In the first half of 2023, we're deploying an updated Techfine for safety tool to our sites to reinforce the need for people to think about the risks before undertaking a task. From a diversity inclusion perspective, our full year position is 29% of our senior leaders being female in line with the 29% position at the end of the prior year. We have a broad program of work underway to drive improvements here, making changes to everything from policies to training to recruitment processes. Finally, turning to engagement. We completed our employee survey during December, and we recorded a 3-point improvement in the engagement score to 53. I was pleased to see the progress in the year, and we continue to drive a range of global and local changes to improve the experience of our employees. Order intake has been relatively robust across our markets during the first quarter, and we're not seeing significant signs of slowdown at this stage. We're expecting revenue growth and margins to align to our financial framework during the second half. Our profit expectation for the full year has not changed from the guidance we provided on the 7h of February. We have experienced further cost inflation at the start of 2023 as we expected, and we continue to offset that through price increases and operational improvements. We're continuing to invest in capacity and capability in our faster-growing segments to accelerate growth and further increase our exposure to those markets. Slide 24 shows the 6-year financial performance summary for the group to the end of 2022. This clearly demonstrates the impact of our strategy with a compound organic revenue growth of 4%, profit growth of 6% and EPS growth of 7% per year. Across the period, our ROIC has expanded 570 basis points to 22.4% and EBITDA margins have expanded 190 basis points to 13.6%. We're delivering in line with our financial framework. The group is an attractive investment proposition. In summary, I'm delighted with the further progress that we've made with the execution of our strategy in 2022. We did 11.2% organic revenue growth with a broad recovery in our markets and through share gains. Operating profit margins increased to 13.6% and ROIC increased to 22.4%. We have a strong balance sheet and have taken a very significant step during the year to de-risk our U.K. pension schemes. 2023 operating profit will be impacted by the cyber attack, but our recovery is on track. Our operating profit guidance for the full year is unchanged. We remain confident of our ability to accelerate the growth of the business and deliver attractive returns through the cycle. Thank you. That ends our formal presentation. With that, we'll now take questions. The operator will now explain the process for Q&A.

[Operator Instructions] And our first question today comes from Scott Cagehin from Investec.

Just 2 questions for me, please. Could you just talk a little bit more about the semiconductor growth and perhaps maybe split out the difference between the market growth and the share wins, if possible? And then the second question is around the cyber incident. Could you just give it flavor where there was more of a SKU to certain divisions in terms of the impact? And what are the lessons learned? Or are you accelerating what you would have not done this quickly in a way, so has it brought an opportunity for you to bring forward your plans there?

So just on the semicon piece, yes, a 37% growth in the year, which we were delighted with, frankly. It's a little bit difficult to fully disentangle the sort of market growth from the share wins just given it's made up of a number of quite small niches. But I think we've I would say, sort of broadly outperformed the market in -- certainly in the sort of CVD material -- sorry, the CVD materials part of the business and the components that we make for crystal growth in silicon carbide, where we've had some really attractive growth opportunities there. And that's certainly holding up nicely as we come into this year. I think we expect that to be a more durable grower notwithstanding some of the other slowdowns in semicon this year. Just on the cyber piece. It's less of a divisional piece, actually, Scott. It's more of a geographic piece. So the sort of penetration into our network kind of effectively came in through the U.S. and just because of features of our network topography and the speed with which we caught it. We saw more impact on our businesses in the U.S., less in Europe and very little in Asia, reflecting the fact that we sort of shut things down as we detected the attack. So it's the businesses in the U.S. that have the biggest impact, sort of almost irrespective of division. In terms of then just our sort of our wider plans. Yes, we've been modernizing the IT estate over the last 5 or 6 years. We're probably sort of halfway through a plan that was going to run through to sort of '26, '27. We'll probably accelerate that by a couple of years overall, deploying some of the new tooling a little faster and certainly speeding up the deployment of our group ERP program.

The next question comes from Harry Philips from Peel Hunt.

Actually 3 quick questions, please. First, just on the armour provision you highlighted. I was just wondering on the size? And then two, is this already resolved? Or is it potentially an ongoing issue? And I suppose, subsequent to that is where should we expect armour revenues to be in '23? The second is in thermal where just looking at the raw mats, I'm sure it might be different underlying, the drop-through looks like 12%, which I imagine there's a chunk of raw materials in there, but just that does seem as sort of a bit lower than we might have anticipated. And then lastly, on the interest guidance, just curious as to the mass to get -- just seeing in the appendix slide, the average was 2.9% last year and given where debt is at the moment, sort of GBP 10 million to GBP 12 million of interest just looks a fraction however than I thought it might be?

I'll pick up the first one, I'll let Richard comment on the other 2. So in terms of the armour provisoin, it's just under GBP 3 million. It is an ongoing sort of arbitration with the customer. So we expect that to resolve in the coming months. In terms of armour volumes, I think we're probably somewhere in the region of GBP 15 million to GBP 20 million this year. It remains unfortunately, quite difficult for us to give really accurate views on that. We don't tend to get very good visibility. And indeed, the sort of tail of this has continued to be much more robust than we've anticipated. But that's the sort of order of magnitude that we're looking at for this year.

Yes, on thermal, I think probably the thing to bear in mind is that pricing activity was weighted a little bit towards thermal, so businesses, particularly feeling the effect of energy inflation during the year. Therefore, it would look like there was sort of lower-than-average drop-through, but actually, it's mainly that inflationary effect. And then in the case of interest rates, the average interest charge on our fixed debt is indeed 2.9%. But with debt having crept up a little bit, we are utilizing our revolving credit facility, where the all-in cost at the moment would be of the order of 3.5% to 4%. And we are anticipating net debt being a little higher through the year, particularly as we're thinking about higher levels of capital expenditure.

The next question comes from David Farrell from Jefferies.

I've got a couple of them, please. Just going back to Slide 13, where you show your positioning in various end markets and the level of differentiation. Is it seems to assume that we should correlate the level of differentiation with the relative margin of each of those end markets? That's my first question.

Yes. Yes, it's a very short answer. The slightly longer answer. If you -- these things are imperfect. But if you sort of start a dot plot of gross margin, on one axis and differentiation on the other, then you see a correlation between level of differentiation and gross margin. We make higher gross margins on the products that are more differentiated.

Okay. And then a couple of other questions. Market share gains kind of has cropped up quite a bit in your release today, and you obviously mentored it through the kind of presentation. What's driving that? Is this kind of the benefit of R&D? Is it the benefit of kind of a healthier, stronger sales force? And then, how kind of sustained do you see those market share gains?

I think there's a number of factors that are in there. So the first thing I'd point to is a lot of work on sort of sales and sort of service operational performance levels over the last 5 years. So as we've got better at meeting customer needs, they've been more comfortable giving us, if you like, a bigger share of their wallet or in some cases, moving us to a sole-source position. And I think as long as we continue to perform, there's no reason why we can't retain that. In general, if they're willing to do that with us, then it is an indication that we've got a sort of product performance that is sort of distinctive and valuable to them. And they're, therefore, willing if you like to take on a bit of sole-source supply risk in exchange for a better performing product. So that certainly helped. We have done a lot of work on new technology, new product introduction. So where we've got some of those newer products with more differentiated features, we've been able to win some shares. So for example, if we've come up with which we have in our thermal business, a new fire protection solution that has a better performance, it has a longer sort of protection lifetime in a fire protection application. The customers in that market, broadly speaking, will pick the best product for the application. And so provided we maintain that technical lead, we will hold on to those share wins. So that's another piece of it. And then I would just say, I think finally, just the work we've done building our R&D activity, investing in sales has led to some deeper customer relationships, in particular with bigger customers in some of those faster-growing market segments. And as they have understood more about our capabilities and trusted us more, they've been more willing to give us sort of access to more opportunities within their business. So there's a sort of overarching piece around sort of markets and trust.

Okay. And then just a final question on Thermal Ceramics. You talked about kind of petrochemical project work. What's your visibility in terms of kind of when that project work finishes because it kind of suggests there's perhaps some lumpiness coming in terms of the overall revenue there?

Sure. Yes. So projects are typically between kind of 15% and 30% of thermal revenues. We would normally expect project activity to lag the industrial cycle by sort of 12 to 18 months just because there's quite a long gestation period in getting these things sort of up and running. So we -- for example, this year, we've seen a little bit of softness in that project activity in Europe in the first part of the year, which we expected to some degree, reflecting just sort of higher levels of the prior year. I don't think we're expecting a significant change in activity levels during this year.

The next question comes from Edward Maravanyika from Liberum.

My question relates more towards capital return. Just thinking in terms of the growth in the dividend declared, which I think was higher than what consensus was expecting. Is that a signal towards priorities if we look at that in the context of M&A? Would you get your comment in terms of what your thoughts are on that? Where you see valuations, what the opportunity set looks like? And indeed, if there is an opportunity set with specific markets or what specific geographies?

So the increase in dividend does not signal any loss of appetite for M&A. So we signaled in our -- in the financial framework that we published at the Capital Markets event that we would move over time towards dividend cover of around 2.5x. And after a good year last year, we felt it was appropriate to start on that journey and improve returns to shareholders. We are continuing to look at M&A opportunities. We have a healthy pipeline of things we are investigating. And should we come across something worth pursuing, then we will take that seriously.

The next question comes from Richard Paige from Numis.

A couple from me, please. Just on -- coming back to the cyber instance. Have you lost much business from that? Or is this more a matter of deferral of existing customers sort of waiting for you to be able to fulfill orders? That's the first question, please.

Yes, we definitely lost a little bit in the first half. I suspect it's some in the region of sort of GBP 10 million to GBP 15 million. And that reflects effectively sort of short-term business where in the early part of the first quarter, we weren't able to give lead times. So the customers, I don't know, got an urgent repair job in chemical plant or something. They want to short turnaround time for the material. And because of the challenges we're having scheduling the plants, we probably missed on those opportunities. So there's sort of an amount of loss there. We don't see it as a permanent loss, if you mean it's just that particular opportunity that will have gone past us.

Okay. Yes. Understood. And then just more broadly on order book. Obviously, we're seeing from lots of people, record order books extended visibility, but that's starting to move supply chain is starting to come down. Are you -- how are you feeling about visibility yourselves and supply chains more generally, please?

So 2 pieces of that. So in terms of sort of order momentum, I suppose. I mean, that remains robust for us, as I've sort of indicated that we're not really seeing any signs of slowing. I've commented on just a little bit of softness in thermal project activity in Europe. I mean, really, that's the only piece across the whole of our sort of set of industrial markets, wider core markets and faster-growing markets, where we've got meaningful signs of anything different. Typically, we don't have a lot of forward visibility. So we are sort of Tier 4, if you like, in the supply chain or in our customer supply chains. So it can be quite late in the day before we actually see signs of slowing. We are assuming, if you like, on a macro level that we see some slowing of industrial markets in the second half of the year, just reflecting the fiscal tightening that's sort of happening around the patch. I think we're probably more optimistic about things like semiconductors and health care and sort of aerospace continue to grow through that. In terms of supply chain, I think we would say, in general, our own supply chains, the situation is definitely much improved over sort of the worst points of the last sort of 24 months or so. We have built inventory in a number of our plants or sort of intermediate warehouses to protect against supply chain issues, and we're intending to retain those inventory holdings at least for the next sort of 12 or 18 months, just given, I think, continuing sort of geopolitical uncertainty. So while we're probably feeling better about supply chains, we continue to be cautious.

Okay. And my last one, just you obviously mentioned inflation being a more, again, a headwind into '23. I'm just wondering, pricing-wise, are you seeing any pushback from customers in regard to that? And ultimately, what sort of pricing element should we be putting in our models for this year, please?

Sure. So I think we're -- I mean, there's a big piece of it depends, right? Sort of energy surcharges and those kinds of things influence the pricing numbers we end up with. But we're sort of assuming that inflation is probably in the region of 6% to 8% this year. And pricing, therefore, is probably going to be sitting in the sort of 5%, 6%, 7% region, something like that. But it will depend on what we see because in many cases, we're just sort of passing through what we get.

Nothing further in the queue at present. [Operator Instructions] We have a question from Mark Fielding from RBC.

Just a quick follow-up actually to what Rich was just asking in terms of -- if we think about the comments you made about sales being flat in the first half and returning to growth in the second half, is that a volume comment? Or is that a sort of all-in comment? I suppose I'm thinking with that pricing element being so significant, does that mean that in volume terms, you're down in the first half of the year and then sort of recovering to a more stable situation in the second? Or just trying to piece those bits together.

Yes, so that's a revenue comment, not a volume comment. In effect, get it flat in the first half reflects sort of some of the impact of the cyber incident and just holding us back in terms of shipments. And then second half, let's say, 4% to 6% volume growth, something -- or 4% to 6% revenue growth, something like that, which on volume terms, if pricing is 5% or 6% is probably flat, and that reflects our assumptions that we'll see some slowdown in some of those sort of industrial markets in the second half of the year.

[Operator Instructions] As we have no further questions, I'll hand back to the management team for any concluding remarks.

Yes, just thank you very much, everyone. I appreciate your questions. And we'll draw it to a close there.

This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.