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

Hello, everyone, and welcome to the Morgan Advanced Materials Half Year Financial Results 2024. My name is Nadia, and I will be coordinating the call today. [Operator Instructions] I will now hand over to your host, Pete Raby, Chief Executive, to begin. Pete, please go ahead.

Thanks very much. 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. Welcome to our interim results call for 2024. I will start with a summary of the results. Richard will then take you through the financial position, and I will then cover the segmental drivers, nonfinancial metrics and the outlook. Starting with the summary. In the first half of 2024, we delivered organic revenue growth of 8.2% and supported by 15% growth in our faster-growing segments and 6% growth in the core. Our operating profit margin was 12.5%, in line with our financial framework with pricing and efficiency improvement continuing to more than offset inflation. Earnings per share of 14.7p is 48% up on the prior year, largely reflecting the weaker comparative period in H1 2023 when we were impacted by the cyber incident, together with some underlying growth. Our capital investment program is progressing well as we invest in capacity for growth in our faster-growing markets and in our core. Our return on invested capital was robust at 19.7%. Our balance sheet remains strong, with a modest increase in leverage from the year-end to 1.3x net debt to EBITDA, driven by our capacity investments. The interim dividend has increased by 0.1 to 5.4p per share. And we've made further progress in reducing CO2 emissions with Scope 1 and 2 down 11.6% over the prior period. Looking to the second half, we are cautious about demand in a number of our markets, and we expect second half revenues to be in line with the first half. Richard to take you 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 30th of June 2024. Revenue at GBP 572.6 million was 8.2% higher than prior year on an organic constant currency basis. This was driven by a pricing benefit of around 3% and volume growth of around 5%, underpinned by continued strong growth in our faster-growing markets. Group adjusted operating profit was GBP 71.3 million. Adjusted operating margin was 12.5%, in line with our financial framework and return on invested capital was 19.7%. Cash generated from continuing operations was GBP 66.1 million, reflecting elevated capital expenditure of GBP 44.6 million as our capacity investment program gains momentum and a normal seasonal increase in working capital of GBP 22 million. Free cash flow was an outflow of GBP 7.9 million. Adjusted EPS was 14.7p per share, and we have increased the interim dividend by 2% to 5.4p. As usual, we have included in the appendix the financial information in statutory format. Turning now to profit bridge. We need firstly to note that the comparative period had the cyber instant net. We reported at the time that this has cost of GBP 23 million of profit. So we've shown the reversal of that year. We are continuing to see weakness in some of our industrial end markets. But nonetheless, we're able to achieve volume growth of around 5%, driven by growth in our pass-on markets. Inflation has moderated this year to around 3.5% of cost of goods sold, driven by wage inflation of around 4.5%, and that has been offset by pricing. Our Simplification program is on track, allowing us to deliver in the first half GBP2.9 million of the GBP 7 million of savings targeted for this year. As previously reported, we have increased our investment in IT over the period from 2022 to 2024, with a GBP 6 million increase in the first half as of an increase of around GBP 8 million expected for the year, much of this driven by our accelerating ERP investment. The other notable item is the FX headwind, which reflects a U.S. dollar rate of $1.27 to the pound and of EUR 1.17 for the half. Moving on to the cash flow. I would firstly note that the working capital cash outflow of GBP 22 million. This is entirely seasonal and is lower than we have experienced in the past, reflecting some underlying improvements in working capital management. As expected, our capital investment has started to accelerate as we progress our plans to increase capacity in support of our faster-growing markets. This totaled GBP 44.6 million in the first half, and our guidance for the full year remains at around GBP 120 million. Net interest payments totaled GBP 7.3 million. Tax paid was GBP 16 million and lease payments and other items was GBP 7 million. Cash flows relating to exceptional items totaled GBP 3.6 million. Free cash flow before dividends was therefore an outflow of GBP 7.9 million. Acquisition expenditure related to the planned purchase of the minority share in our Korean joint venture. Then other items mainly comprised purchases of our own shares for share incentive schemes of GBP 3.3 million and dividends to non-controlling interest of GBP 2.3 Net debt finished the half at GBP 222.3 million, excluding these liabilities, representing 1.3x EBITDA. We have included our usual summary of our funding profile in the appendix. Simplification program is being implemented as announced earlier in the year. As a reminder, this has firstly allowed us to start managing the group through 3 distinct segments, which are formal products, focused on opportunities in which heat resistance, fire protection and insulation or principal product attributes. Performance Carbon focus on opportunities for carbon-based components and semiconductor or rail, aerospace, power generation and other markets and technical ceramics focused on the development of our advanced ceramic applications in semiconductor, health care, aerospace and industrial equipment. In addition, as we noted in our recent capital markets event, we have closed a number of inefficient or poorly utilized sites over time with 19 such sites closed between 2016 and 2023. 4 more sites are currently being closed, which along with some back office and other cost savings, will deliver GBP 7 million this year and a full run rate of GBP 10 million by next… Moving on to technical guidance. I would note, firstly, that our capital expenditure guidance for the next 3 years is unchanged with around GBP 120 million for this year and then around GBP 100 million in each for the next 2 years. Our outlook for cash flow in 2024 is also unchanged, with a net cash outflow of around GBP 40 million to GBP 60 million for the year, with year-end net debt in the range of GBP 230 million to GBP 250 million. Our net finance charge remains in the GBP 17 million to GBP 19 million range with GBP 15 million to GBP 16 million of debt interest and IAS 19 charge of GBP 0.5 million and GBP 2 million of lease interest. We expect our adjusted effective tax rate to continue at around 27% and contributions to non-U.K. defined benefit pension schemes to be $3 million to $4 million. We have seen a further strengthening of sterling against the U.S. dollar and euro this year as well as versus several transactional currencies. Current assumed exchange rates for the major currencies are USD 127 EUR 117. Our dividend policy remains to cover of around 2.5x over the medium term. Thank you, and I will now hand back to Pete.

Thank you, Richard. Slide 11 shows the organic performance in our major markets see a split between our faster-growing segments and our core. The comparative period was impacted by the cyber incident, and that accounts for around 4% organic growth. Our faster-growing markets were up 15% in the first half with strong growth in each of those markets. Semiconductors was up 14% on the prior year, a further very strong performance, reflecting continuing good momentum in the silicon carbide power electronics segment and in Ireland implantation. Health care was up 9%, driven by medical seal, plant tools and power tubes or medical scats. Clean Energy & Transportation was up 27%, with good momentum in wind and solar energy and in electrified road. Moving to the core. Transportation grew 19% with Aerospace, again, the driver. Chemical and petrochemical sales were down 5% with lower aftermarket seals bearing volumes, in particular in China. Security and Defense grew 18% with the strong U.S. defense market to drive. Industrial and metals markets were flat, reflecting weak industrial market demand, particularly in Europe and China. Turning to our business segments. Thermal Products delivered revenues of GBP 221 million with organic growth of 2.4%. Margins improved to 10.9%, with recoveries from the cyber. Performance Carbon delivered revenues of GBP 179 million, with organic growth of 18.1%, driven by strong demand for semiconductor and aerospace products. Margins expanded to 17.5%, reflecting the cyber recovery and organic growth. Technical Ceramics delivered revenue of GBP 172 million with organic growth of 6.7%, driven by health care, clean energy and aerospace and expense. Margins expanded to 10.9%, reflecting recovery from the cyber event. Turning to our nonfinancial performance. Slide 13 shows our progress in reducing Scope 1 and 2 CO2 emissions since 2015. We -- our CO2 emissions in the first half were down 11.6% on the prior period. We've reduced our absolute Scope 1 and 2 emissions by over 50% since 2015. We are on track to meet our 2030 goal of a 50% reduction from 2050 despite the significant business growth for care. Our water withdrawal reduced 8% during the year with efficiency measures and some mix effects driving the improvements. Artisan stressed areas reduced by 4%, driven by efficiency projects in our plants. We are on track to meet our 2030 -- our safety performance improved significantly with lost time accident rate of 0.13 compared to $0.19 for the prior full year. I'm delighted with the progress here, and I would like to thank our teams for their continued focus on safety. We're continuing to work hard on this, and we'll be making further improvements to our process safety and embedding our behavioral safety tools more fully in the balance of the year. From a diversity and inclusion perspective, our half year position is 34% of our senior leaders in time, a step up from the 30% position we had at the end of last year. I'm pleased to see these measures start to move, and it reflects the actions that we've been taking in recent years. We have leading differentiated market positions across our business, which we segment between faster-growing markets and RPO. The share of our faster-growth markets has increased again and now represents 22% of our business. In our faster-growing segments, semiconductors, health care, clean energy and clean transportation, we have a mix of emerging and more mature positions. These markets have good underlying long-term growth drivers, and we expect to grow more quickly than our core market over the cycle. We also expect higher margins in these segments as our products are typically newer and more differentiated. As we announced last year, we're investing in new capacity for the semiconductor market, including to support customers making select carbide power electronics. We remain sold out of key consumable components for that market, and we have additional capacity coming online in the second half. Health care demand is also high we're increasing capacity in North America to serve that market. Our core representing 78% 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 introduce the new technologies and products that our customers need to become more sustainable. For example, our new fiber capacity investment in India is on track, and I expect that to be operational in the first quarter of next year. Our new paper line in China was commissioned in the middle of July and we're already making sales from that line. Slide 16 shows our financial framework. We updated this in the first quarter of this year to increase our expected growth rates given the big organic opportunities we have across the group, in particular in semiconductors. The framework lays out our through-cycle financial targets for organic growth, through margins, returns and capital deployment. And this leads to our commitment to deliver enhanced EPS growth through the cycle. In the first half of 2024, we're in line with or ahead of our framework on every Leisure. Organic revenue growth of 8.2% is above our 4% to 7% range. Operating margins of 12.5% at the bottom of the range, and we expect those to expand as the business grows in the next 3 years. Return on capital is towards the top of the range, and we expect to be around top of the range as the business grows. We finally leverage is within our 1 to 1.5x range, excluding acquisitions. The framework is set up to reflect our potential to deliver attractive EPS growth, and we delivered 48% EPS growth in the first half. Much of this reflected the weaker cyber impacted comparator, but underlying earnings are up on an organic basis from the prior year. Looking ahead to the full year, while we're seeing good momentum in our faster-growing markets and in aerospace and defense, we're cautious about demand in certain of our end markets, in particular, the industrial and Metals segments. Our outlook for full year organic revenue growth is towards the top end of our 4% to 7% financial framework range with H2 revenues in line with H1. We expect operating margins to remain at around 12.5% with pricing and continuous improvement, offsetting inflation. Capital expenditure will be around GBP 120 million, as previously guided, as we invest in capacity for growth in our faster-growing segments and in our core. So in summary, we've grown revenue 8.2% with 15% growth in our faster-growing markets. Our margin at 12.5% are in line with our financial framework, supported by organic growth, the recovery from the cyber incident and our restructuring program offsetting a considerable increase in IT expense. Our organic investment program is on track, and we expect it to deliver an acceleration of organic growth in the next 4 years. Our restructuring program is progressing well. While we're cautious about a number of our end markets, the group is increasingly well positioned. We have a strong balance sheet, enabling us to fund our organic investment and M&A or capital returns to shareholders, and we expect to deliver attractive growth in earnings through the cycle. Thank you. That ends the formal presentation. I will now take questions, and I will hand back to the operator to coordinate that.

[Operator Instructions]. And the first question goes to Scott Cagehin of Investec. Scott...

Congratulations on a great set of results. So just 2 quick questions for me. First one being, Richard, how do you see the volume and pricing playing out in the second half flight to split between the 2. If you can give any color there, that would be fantastic. And secondly, could you give a bit more detail on the phasing and the progress you're making on the increased investment in semiconductor...

Scott, thank you for your kind words. So yes, second half of the guidance we put out clearly implies revenue growth of about 2% in the second half. You can allow about 3.5% for FX. So if you like, around about 5.5% underlying pricing should continue at about 3%. So it gives you about 2.5% volume lower than the first half, but clearly still in line with our financial framework. On the phasing of investment, we saw GBP 44 million of capital in the first half. Normal maintenance expenditure in half would be, say, GBP 25 million. So let's say, about GBP 20 million of the capital -- of the capacity CapEx has gone in already, we would expect more than that in the second half. So something like another GBP 40 million or so in the second half, so roughly sort of 1/3, 2/3 weighting. Does that help?

Perfect. And when do you visit sort of revenues and profitability coming through on that investment?

So as we communicated at the Capital Markets event starting in 2026 in the Maine. There is some -- there's a little bit coming through next year, but in the maine in 2026, with a close to full run rate by 2027. You'll recall we signaled at I'm ultimately a full run rate revenue of GBP 85 million and profit of GBP 25 million on that revenue.

Thank you. The next question goes to Jonathan Hurn of Barclays. Jonathan...

Just a few questions from me. Just the first question, I just wondered if you could talk a little bit about what you're seeing from your EV exposure in your EV customers. Are you starting to see a little bit of change in terms of their order patterns? I take on board that you're fully sold out, but maybe sort of obviously new capacity is coming online. Is there any chance for what you expect to come in and fill that capacity maybe sort of taking a little bit of a slower ramp, please? That was the first one. The second one was just on M&A. Obviously, I might have missed it, I don't think you mentioned that in the presentation. I think last time you heard potentially sort of 6 targets, 25 million to GBP 75 million in terms of value, where are you on that? Has there any been any change -- and then thirdly, maybe just for Richard, just in terms of this -- looking to FY '25 and the profit ratio, I wonder if you could just sort of talk us through the main moving parts. So obviously, we've got new capacity coming on that will obviously deliver some profit. We've got some drop-through from the growth, and I think there's probably another incremental GBP 3 million savings. But in terms of the offsets, can you just sort of talk us through those as well. I mean, obviously, I think there's probably going to be some more IT spend. So those are the 3, please.

Jonathan. I'll pick up the first 2, and I'll let Richard comment on the bridge. So on the EV piece, so electric vehicle sort of demand, I suppose, consumer demand is slower than I think people anticipated, let's say, a year ago. And that is rippling down through the supply chain to us. And we have seen some of our customers sort of pushing out demand as a consequence. As I commented, we are still sold out. So to some degree, this is -- the market is a bit less undersupplied than it was as a consequence of that. So we're not seeing that have an impact, particularly on the overall revenue position for this year. I think if we look forward, back to perhaps the capacity that Richard was referring to, I think it's reasonable to assume that the market demand will be a bit lower in 2027 and perhaps sort of analysts were expecting last year, we were cautious in planning for our capacity investments, and we haven't seen anything that sort of changes our investment case at this point. So we're not expecting a different outlook in terms of our sort of investment rate. In terms of M&A, I think the pipeline is sort of vibrant -- we're continuing to be disciplined. We have sort of looked at and walked away from a couple of things in the last several months. We're working through the next range of prospects. I think some of those conversations will take a while given the sort of privately held nature of those. So it's probably not expecting anything imminent, but continuing to make good progress overall. Richard, on the bridge?

Yes. So for 2025, Jonathan, I think, first of all, you're right, yes, GBP 3 million or so of benefits of simplification. We would expect pricing and continuous improvement to offset inflation. I see probably not another material change. We are just looking at the timing of the ERP expenditure, maybe another GBP 1 million or GBP 2 million. But in terms of the bulk of that increase, it's now in the numbers for '24. So that does bring you on to revenue growth. I think we would be cautious in the outlook for the general industrial markets, but we do expect double-digit growth from faster-growing markets. Some of which will be underpinned by capacity investment that we've already made. So we talked previously about the GBP 100 million associated with Semicon and something like GBP 40 million associated with other markets. In that other category, there have been some investments that will start to bring forward capacity in 2025. And equally, in the case of Semicon, the benefit of some investments we have made in prior years underpinning capacity. So in summary would be revenue growth cautious on industrial end markets, but with continued opportunities utilize capacity for faster-growing markets.

The next question goes to Harry Philips of Peel Hunt.

2 questions, please. Just on the caution comments for the second half, just looking at your chart through the faster-growing markets and the other pieces. And just wanting to -- is it just solely primarily that industrial's 27% piece? And then secondly, sort of specifically around health care and medical where clearly, different parts supply chains seem to be in different parts of destock starting to see some signs of recovery. So just -- obviously, you've done well. So clearly, you're at the front end of that. And then just looking to Jonathan's question about the bridge. -- faster-growing markets growing at next year and 20% of sales, even I can work out about 2% growth. So would you hope that 25 organic revenue growth inside your sort of 47 target range, please?

Sure. Harry. So yes, in terms of the markets that we're looking at, yes, the driver of our caution is industrial and metals markets almost exclusively as you were signaling. So we've seen weak markets in Europe during the first half and we flagged that when we spoke in March. Similarly, sort of markets in China have been weak throughout the first half and if anything weakening further. I think probably the piece that's also shifting then is just the U.S. So we've seen a slowdown in order intake from that market over the last sort of 5 or 6 weeks. -- which sort of chimes to some degree, what we're seeing in the macro. So we're expecting some softening in that market going into the second half of the year. So that's our sort of note of caution for those industrial metals markets that it's probably sort of 40% of sales. Health care has been robust, as you pointed out. I think the biggest driver for us has been implantables. So we're making sort of ceramic feedthroughs that are used for sort of cochlear implants, neuro-stimulation, better management, these kinds of applications. Obviously, we -- you've got some fan comparators from the Cyber so we got a bit behind last year because some of the knock from that. So we'll see that's caught up in the first half of this year and then just good underlying market demand for that. And I think then, as to your last point, so yes, we would expect to be growing within our organic revenue range for next year. So as you say, if it's a couple of percent from faster-growing markets, we've then got things like aerospace, defense, India, fire protection that we would expect to be growing nicely into next year and then probably some modest growth in other markets, so that should put us in the range.

If I may just come also on the pricing. And pricing has always been a sort of positive virtue in Morgan over a long period of time. But as lead times normalize and everything else, are you sensing any additional pressure? I mean just you referenced the sort of slowdown in North America. Does that slowdown come with pushback on pricing and people looking around your peers around that particular aspect? Or are you pretty confident you can still match what Richard was outlining just a moment ago around that sort of pricing offsetting inflation? Or clearly, where as you wouldn't say, I guess, but just more elaboration would be helpful.

Yes, sure. So for this year, as Richard said, we're loss pricing for this year is sort of done, right? Much of that is done in the first quarter or the first part of the year. So we sort of know what that's going to look like. If we look ahead to next year, I mean, pricing is definitely moderating, right? We've been seeing lower labor inflation and lower materials and energy inflation. And as a consequence, our need for pricing is lower. I think we'll be heading back towards sort of more normalized levels of 1.5% to 2%, depending on what's with inflation rate. I think the only place where I'd say things are very demanding on pricing is China. So that is -- there is some deflationary input prices there. And so customers are reluctant to see price increases. We have still been making some but it's tougher there. I think in other parts of the world, it is sort of steadier, but my expectation is that pricing comes down.

And Harry, bear in mind that our objective is pricing and continuous improvement offsets inflation. And as we're going to make sure if pricing is coming down and as Peter has described, we can to some degree ramp up continuous improvement to make the formula work.

[Operator Instructions]. And the next question goes to Maggie Schooley of Redburn Atlantic.

Richard Ponting. I guess I had 2 questions, if you could. Going back to SIC, I think clearly, you've outlined that the market is undersupplied and that you feel confident that you're sold out for this year. But as we move through the rest of the capital expenditure program, if what you find is that others are bringing on capacity quicker than you had thought and demand is weak. What flexibility do you have there in terms of your investments? And could this -- what is your reaction that -- if that comes to fruition? And then the second question I had is just a little bit to understand what's going on there. Technical Ceramics margin. Didn't recover as much as perhaps I might have expected. Perhaps I'm wrong, but is there anything in that drop-through that we should be thinking about or any dynamics there within Technical Ceramics.

Yes. Sure, Maggie. So on the shipping carbide piece, yes, so this year sold out, our plans remain the same given the outlook we're seeing at the moment. The way we are executing that capital plan, it's a series of incremental adds into existing facilities. If we were to find ourselves in a position where demand has slowed to the point where that capacity wasn't needed or indeed, there was excess capacity in the market for some reason or another, we could slow down on individual elements as part of that capital plan. So we would choose to take a sort of GBP 5 million or GBP 10 million chunk of that, and we would delay it to line up capacity more closely to demand. That's not something we're seeing at the moment, but we have the ability to do that, should we see any kind of meaningful shift in the supply-demand balance for that market.

And on technical ceramics, Maggie, there's a couple of things going on. So there has been an underlying increase in overheads. So some sales and R&D and manufacturing-related overheads in preparation for further growth. And then in terms of mix, you'll have seen that we've had a sharp growth in aerospace. In the industrial numbers, there has been some softness in one of our high-margin businesses in Europe. So if you take those 2 things together, that causes a slight dilution from mix. So nothing individually particularly dramatic, but those have sort of come together to slightly depress margins...

I guess if I think about the medium term, I think our view on the margin outlook for that business has changed and that should still be a sort of mid-teen margin business.

Yes, excellent. And we think kind of by '20 -- demands aside '26, '27, we should still be seeing that progression as we get operating leverage with growth coming back on that...

Yes. I think we'll start to see some of that progression in the second half Maggie. Some of the investments will start to deliver...

Thank you. We have no further questions. This now concludes today's call. Thank you all for joining. You may now disconnect your lines.