Morgan Advanced Materials plc (MGAML.XC) Earnings Call Transcript & Summary

Good morning, or good afternoon all. Welcome to the Morgan Advanced Materials Half Year Results 2025. My name is Adam, and I'll be your operator for today. [Operator Instructions] I'll now hand the floor to Damien Caby to begin. So Damien, please go ahead when you are ready.

Thank you, Adam. Good morning, everyone. Welcome to our interim results call for the first half of 2025. I'm Damien Caby. I'm the Chief Executive of Morgan Advanced Materials. I was appointed CEO on 1 July from the position of President of our Thermal Products global business unit. And I'm delighted to be presenting to you today. I'm joined by Richard Armitage, our CFO, for this call. I will start with a summary of the first half and the overall market environment. Richard will then take you through the financial position and the segmental drivers. And I will come back to share my initial thoughts and views, and some of the opportunities that I can see for Morgan. And I will then cover the outlook for the remainder of 2025. Before that, I would like to thank all my colleagues for their openness and support. Having been in the company for more than 2.5 years, I already had a strong understanding of our operating model and of our empowering culture. I carried out an intense programme of site visits and engagements in the second quarter, discussing strategies, our teams, our customers. I've been impressed with the commitment to business performance, safety and the openness for constructive challenge, and the improvement mindsets of our colleagues. Pete Raby not only leaves a business which is in good financial shape and aligned with promising markets, but also a very powerful company culture. He and Richard, as well as all our colleagues, have been very supportive in this CEO transition. Let me move on now to the key points of the first half. As anticipated, we saw continued challenging conditions across most of the end markets we serve. Our revenues were down 5.8% year-on-year at constant currency in line with expectations. Versus H2 of 2024, this is flat. The expected further reduction of semiconductor sales was largely offset by increases in the core markets. Despite the end market environment, we delivered resilient margins. Group adjusted operating margin was 11.1%, which is down 90 basis points year-over-year, but up from 40 basis points versus H2 2024 on a constant currency basis. This was supported by pricing and continuous improvement, combined with the successful completion of the majority of parts of our current self-help programme. In reaction to the tough market conditions in silicon carbide semiconductors, we have been proactive in managing our CapEx expenditure. The programme is now substantially complete with a total investment of GBP 55 million against the previously announced reduction to GBP 60 million. Ramp up of production is expected to start in 2026 and we have the ability to quickly expand capacity further when the market conditions improve. Our results announcement released earlier today provided our views on outlook. I will come back to that topic towards the end of the presentation. As a reminder, on the rationale around our simplification programme, we are right-sizing the group's manufacturing footprint and capacity. And we are consolidating and optimizing our supply chain and building more manufacturing flexibility. The benefits from this programme are materializing as planned. We expect to have reduced the site footprint to 60 by the end of 2025 versus 85 sites in 2016. With this, we will deliver the full expected cost savings of GBP 24 million in 2025 and GBP 27 million in 2026 and beyond. We now have a leaner supply chain. We are more agile to provide reliable delivery and quickly respond as market recover. We will not stop there. We will continue to work on possible further areas of simplification and optimization, and I look forward to updating you on these in due course. Let's now look at our end market performance in more detail. This slide shows the year-over-year organic performance in our major market segments split between our faster growing segments and our core. Outside aerospace, security and defence, the majority of our markets remain challenging, particularly semiconductors. However, we have seen signs of stabilization in the first half. Semicon was down 35% versus the same period last year. This is a decline that we had expected at full year results. As previously noted, this is mostly driven by overstocking in the silicon carbine supply chain which has only been partially offset by a progressive uptick in demand for silicon semiconductors. For context, semicon is a single digit percentage of overall sales for the group, but it has double digit structural growth rates and it provides higher margins than the average of our portfolio. Healthcare is affected this year by the uncertainty of imaging and analytical end markets, which has been driving inventory adjustments, and by changes in some customers product mix. Security and defence has grown strongly at 11%. Aerospace continues to perform well and is offsetting the challenging conditions in automotive. Industrials and metals was down 5.7% showing continuing market weakness as expected. Overall sales in our core market have increased by 4% sequentially and project activity shows early signs of improvement. Whilst there are no clear trends in any specific market calling for a recovery, we are therefore seeing signs of stabilization. I will now hand you over to Richard to take you through the financial results and I will return to talk about the opportunities we see ahead, the outlook and our key takeaways.

Thank you Damien, and good morning, everyone. I would like to start with an overview of the financial results for the half year to the 30 June 2025. As expected, revenue at GBP 522.6 million was 5.8% lower than prior year on an organic constant currency basis. This was caused by the decline in a number of our end markets that we saw during the second half of 2024, albeit that semiconductor is more challenged than expected whilst clean energy and transportation, aerospace, petrochemical and defence have all held up well. Pricing was around 3% reflecting a calmer inflationary environment, giving a volume decline of around 9%. Revenue in our faster growing markets declined by 17.2% overall with the main driver being semiconductor, which declined by 35%. Group adjusted operating profit was GBP 58 million, a reduction of GBP 13.3 million, giving an adjusted operating margin of 11.1%. Return on invested capital was 16.2%, slightly below our through-cycle range but still delivering an attractive return. Free cash flow with an inflow of GBP 1.2 million which shows an improvement over last year as we work to improve our working capital. Adjusted earnings per share were 10.08p per share and we have held the interim dividend flat at 5.4p. Specific adjusted items amounted to GBP 16.3 million for the half year. In the light of continued uncertainty in some of our end markets, we are not assuming any overall improvement in our revenue or profit performance in our second half compared with the first. Turning now to the profit bridge, we can firstly see a negative FX impact of GBP 4.6 million in the first half which is now likely to be GBP 8.4 million for the full year. This reflects in particular the progressive weakening of the U.S. dollar versus sterling with an average rate of $1.27 in the first half of last year compared to $1.30 this year. As you would expect, a 9% volume decline and associated overhead under-recovery combined with a mix effect of semiconductor sales being weaker than expected has had a significant impact on our profitability. The combined effect of lower volume and weaker mix is therefore GBP 29 million with approximately 50% due to each. Pricing of around 3% has served to offset inflation of around 4% of cost of goods sold. We have continued our strong focus on self-help with efficiency savings amounting to GBP 11.4 million and savings from our simplification programme amounting to GBP 7.6 million as expected, both helping to mitigate the impact of the volume decline. At constant currency, the overall profit decline was limited to GBP 8.7 million. Looking at the segments in more detail, we can see the impact of weaker industrial markets on Thermal Products. This segment has a relatively inflexible fixed cost base, so the impact of lower volumes dropped straight through to adjusted operating profit and margin, albeit partly mitigated by simplification savings of around GBP 2 million. Performance Carbon was impacted by lower volume and weaker mix being the segment most affected by the weakness in semiconductor demand. However, part of this was mitigated through simplification savings of around GBP 4 million. Technical Ceramics demonstrated the benefit of its differentiated product portfolio with weakness in semiconductor and healthcare offset by growth in aerospace, security and defence and clean energy. Around GBP 1 million of simplification savings contributed, allowing the segment to achieve a small expansion in margin. Moving on to cash flow, I would firstly note working capital. This was an outflow of GBP 4.7 million, but was much lower than the outflow seen in previous years due to actions taken to support working capital. Net capital expenditure amounted to GBP 40.5 million driven by investment in semiconductor capacity. This phase of investment is nearly complete and expenditure is expected to tail-off sharply in the second half. Cash flows relating to exceptional items totaled GBP 15.3 million, reflecting our ongoing simplification programme and investment in our ERP roll-out. For the full year, these are expected to be around GBP 30 million. Free cash flow before dividends was therefore an inflow of GBP 1.2 million. Net debt finished the half at GBP 249.1 million excluding these liabilities in line with our expectations but representing 1.7x EBITDA given the lower EBITDA. We expect to return this to within our framework range by the end of the year. Specific adjusting items comprise 2 elements. Expenditure associated with our business simplification programme was GBP 10.7 million in the first half and is expected to be around GBP 9 million in the second. I will provide a progress update on the next chart. Our ERP programme has progressed to plan with implementation at the pilot site in Italy now substantially completed. Work is progressing to accelerate the rollout during 2026. Moving on to the simplification programme in more detail, a reminder that the weak market conditions experienced later in 2024 have led us to expand the programme such that we expect to deliver GBP 27 million of savings by 2026. The GBP 7.6 million delivered in the first half provided a material mitigation to the weak market conditions. Activity centered on the closure of a site in the U.S. as well as back-office restructuring and manufacturing headcount reduction across the group. The current rate of expenditure will continue in 2025 with around GBP 9 million expected in the second half, followed by a further GBP 5 million in 2026 as we conclude the programme. As previously noted, our manufacturing sites have reduced from 85 to 60 over the last 10 years, a reduction of 29%. As previously announced, we have scaled back our investment in semiconductor capacity in response to the slower than expected growth in battery electric vehicles. Our latest estimate is that this will amount to GBP 56 million over the 3-years to 2026, with most of that having already been incurred. This level of investment provides us with the essential services and equipment needed for likely demand requirements in 2026 and 2027, as demand returns. We will then be able to match incremental capacity additions as the pace of recovery becomes clearer. We therefore expect capital expenditure to amount to around GBP 70 million this year with GBP 40 million having been incurred in the first half, then to be in the range GBP 50 million to GBP 60 million for the next 2 years. This allows for investment in capacity for growth in other markets where we are seeing strong demand. We will also note likely start-up costs of the order of GBP 7 million that will be incurred in 2026 as the semiconductor investments are commissioned. Finally, on technical guidance, we would expect net debt to remain within our guidance range of GBP 230 million to GBP 250 million and year-end leverage to be around 1.5x. Our net financing charge will remain in the GBP 18 million to GBP 20 million range and our effective tax rate in the 26% to 28% range. Our dividend for 2025 will remain in line with that for 2024 and we would intend to return to cover of around 2.5x as markets recover. I would also note that so far the direct impact of tariffs has been immaterial. We continue to note the potential for indirect impact on end market demand. Thank you. And I would now like to hand back to Damien.

Thank you, Richard. I am delighted to take the lead at Morgan, a global leader in advanced materials. As I mentioned earlier, my time at the group within Thermal Products has allowed me to understand and experience our operating model and our empowering, candid and growth minded culture. Whilst we continue to have difficult market conditions to navigate, Morgan is a high quality business, well positioned in attractive markets and I see significant opportunity ahead. There is a common thread emerging from my experience with Thermal Products and my recent exposure to the rest of the group. As the global leader in advanced ceramics in carbon, we are uniquely positioned to design and supply the higher performance, better design, more integrated materials and components with which the industry needs to respond to several globally significant megatrends. I have spent my entire career in specialty additives, processing aids, materials and I have rarely seen such a quality business, well positioned in attractive markets with significant opportunity ahead. I would like to touch on some of my observations on the strengths of the group. Our products and solutions portfolio is very well placed for growth and value, driven by 3 mega trends. The first one is carbon reduction. There is a structural shift across multiple industries to higher efficiency equipment, lower carbon processes and electrification. These trends raise considerable material challenges for our customers. And our advanced ceramics and carbons are in many cases well placed to solve these challenges. For example, we're uniquely capable to manufacture thin and complex shaped casting cores for the manufacture of jet engine blades, allowing them to operate more efficiently at temperatures above their melting points. And we're gaining market share after being selected for several new jet engines precisely because of these capabilities. The second is advances in healthcare, which also bring material challenges in medical devices and implants, in diagnostics equipment and in drug delivery. Our Technical Ceramics are a material of choice, notably due to their biocompatibility, non-toxicity, their durability, their resistance and their customizability. And we are addressing complex requirements such as the miniaturization of implantable devices. And the third is the ascent of power electronics, which enables advances in electric vehicles, AI and power storage. The wider adoption of this technology depends on the reduction of its cost, which raises opportunities for Advanced Materials. Our advanced graphite system provides significant efficiency gains in the manufacturing of silicon carbide semiconductor. To address these material challenges, our technology leadership is a key differentiator. It consists of 3 things. We co-develop with the customer commercially viable manufacturable solutions for their needs. And the level of prowess in design and production engineering, which I have seen our colleagues deploy in complex cases, is truly impressive. Their passion, their creativity, their expertise and collaborative approach create customer loyalty to Morgan. Second, we apply material science to develop differentiated solutions. Ceramics, carbons and graphite are very versatile materials. Our scientists adjust their physical characteristics within a wide range through formulation and processing parameters. Three months ago we launched a new carbon brush for wind turbines where we have configured our material surface to enhance performance and use significantly less silver than our competitors. And the third is that across the group, technology development is managed in close commercial alignment with our customers and it is focused on the strategically selected roadmap which are set by each of our businesses. This leads me to another key strength which is our decentralized model. At Morgan, the business decision-maker is closely connected to the customers, and he and she and she ensures that we are in step with their needs. Financial accountability is decentralized as well and our business leaders have a owner's mindset. They act and react with agility to achieve their financial goals. Our customers come to us because of their experience of our product quality and collaboration in design. In customer surveys, this is where we score the highest. Together with a thorough and complex qualification or certification process, this creates a loyal and sticky customer base. And last but not least, our financials are robust. We have double digit margins, we have a strong ROIC which is evident through the cycle, and I'm confident that both would expand quickly when markets return to growth. Our financial performance is underpinned by simplification, agile cost management and our embedded practices of continuous improvement. We maintain a robust and prudent approach to capital allocation helping to deliver strong returns to our shareholders. Let me now turn to my initial thoughts about where I see opportunities to unlock significant value. We have a well-established and successful practice of simplification. As mentioned before, our current programme is progressing to plan and will complete as expected during 2025. I can see potential for further opportunities to optimize our footprint and our administrative processes. We have also made investments in data management in the past 2 years which provides more visibility on product flow. With our smaller number, but more agile set of sites, we can further improve operational gearing as we move forward. We are not yet making the most of the scale of the grouping supply chain. In procurement, our indirect spend of more than GBP 150 million is managed at site level. The opportunity to consolidate the spend and proactively manage the key categories provides scope for material savings. Another opportunity in supply chain lies in enhancing revenue by improving delivery performance. In my outreach and travel to our site, I was struck by the correlation between profit margin and growth rate on the one hand, and lead time and deliver reliability on the other hand. There are also high quality growth opportunities within our current field of expertise. And given the simplified manufacturing footprint, we are able to respond to opportunities and bring in new capacity in a modular and disciplined way. Besides, across the portfolio there are opportunities to expand from component supply to system supply over time. We do this, for example, in fire protection for implantable devices. Our margins are higher where a party or the owner of the certifications and qualifications, and the switching barriers are higher. And finally, the advanced materials universe in which we operate is ample. There is opportunity to leverage our expertise, our channels to market, our strong customer relationships to move into other high quality, high growth adjacencies organically and inorganically. And conversely, we shall strive that each part of our business portfolio contributes to the progressive improvement of the quality of our business. I will provide further comments on this at a separate event in December. You will be familiar with this slide. I'm confident that we are well positioned to deliver on the objectives laid out in the financial framework as our markets recover. Moving on now to the outlook. We are cautious about demand in a number of our end markets as the geopolitical and economic environment remains uncertain. Therefore, revenue guidance for the full year remains unchanged, with organic constant currency revenue expected to decline by a mid-single digit percentage level. This assumes that the market stabilization in the first half continues, but with no expectation of recovery in the second half. We expect profitability to be around the bottom end of the consensus range, impacted by weak market conditions, by the mix effects previously mentioned and foreign exchange headwinds. We expect free cash flow to normalize during the second half of the year as investment in semiconductor capacity and our simplification programmes are now both nearing completion. And this will assist in a return to a leverage of 1.5x by the end of the year. Looking towards 2026, we note early signs of stabilization, but we remain cautious about the end market demand given the ongoing external uncertainty. We expect to commission our new semiconductor capacity during 2026 and this will incur one-off startup cost of approximately GBP 7 million as a result. A few concluding remarks now before we open up to any Q&A you may have. As we have highlighted and as expected, market conditions continue to be challenging. As a team, we continue to actively control what is within our grasp, and we have delivered a leaner and more efficient business. As I highlighted, we have some fantastic strength and capabilities as a group. These are strong foundations and we have significant opportunities for further enhancements. I believe that we are well positioned to rapidly grow profit when markets come back. And finally, I would like to thank all the group's employees for their dedication and commitment to our success. Thank you. I'll end our formal presentation and we will now take questions. And I will hand it back to the operator to coordinate that.

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

Just a couple of questions from me please. The first being around semiconductor, could you just talk us through some of the drivers behind the large year-on-year revenue declines and how you see that playing out through the rest of the year? And then on top of that, how do you see profitability net the GBP 7 million one-off cost in semiconductor for the group? And the second question is, could you give us any flavor of some of the adjacent areas that you could look to move into overtime?

Okay, thank you, Scott. So I'll take the first one, I'll hand over to Richard for the second and be back for the third one. So semiconductor, as you know our business in semiconductor is really split in 2 areas: the silicon carbide semiconductor, silicon semiconductor. And these have slightly different dynamics. In silicon semiconductor, there was a slowdown which was not as large as the silicon carbide, and we are now seeing some signs of recovery. It's slow, but it's real. And we've seen increase in demand in the second quarter and that's probably going to continue at a moderate pace. Silicon carbide, the significant decline that we noticed in the second half of last year and that accelerated in the first half of this year is essentially driven by the fact that the end demand has reduced and that there was a significant buildup of inventory along the supply chain. And that's essentially what's driven the acceleration of the decline in the first half. There is still inventory in the supply chain. Everybody expects and our customers expect that it's going to take some time to be resolved and then however, the end-markets remain very attractive and demand -- the underlying demand is there -- is continuing to grow at double digit rates.

Scott, so startup costs, firstly GBP 7 million is not a huge amount, that these are known processes. So what we're anticipating is being ready for production out of those new assets during or by the end of 2026. I think if you go back to when we first started talking about semicon, we had anticipated demand in 2026. So therefore at the time, if you will, the startup costs were simply being swallowed by the gross margin on that demand. We're not calling when the market is going to recover. Damien has just made the point that there are still particularly inventories in the silicon carbide supply chain. So therefore what this is describing is getting ready next year, but not anticipating exactly when that demand is going to pick up.

And coming back to the opportunities to unlock significant value. So as you've seen, I mean, there are different nature. Some are really of operational excellence nature and are really -- we have the systems to activate them. Some of them are going to be more in terms of -- are going to be implemented more and more sequentially in terms of growth in targeted high value areas and extending into system supply. So this is going to be taking a different time depending on the nature of the initiative. And I'll be coming back in December to share more about the time and the impact of these actions.

The next question is from Jonathan Hurn from Barclays.

Just 2 questions from me. Firstly, just coming back to that sort of semicon CapEx, obviously that has come down. In terms of that sort of revenue opportunity from that CapEx, now how do we think about that? Is kind of GBP 37 million the right number in terms of the revenue opportunity there? And then just sort of linked to that, what are we seeing in terms of customer behavior and sort of filling that capacity that you put in line? Is that still at all okay? Are some customers deferring their sort of orders into you? Are you seeing sort of that sort of expected capacity utilization coming down? That was the first question. And the second one was just in terms of that -- one of your final slides, just in terms of those sort of upside to the simplification savings. Just thinking about that going forward, does that mean ultimately we probably will see upside to that GBP 27 million number that's currently out there? And if we do, when does that start to come through? Is that more of a '26 type timing or in terms of those incremental savings, does that mean we should get another sort of raft of profit sort of savings coming through in '27? Those are the 2.

Jonathan, thank you for those. Yes, semicon CapEx, so we are still confident that the investment will achieve our target return on capital of 20% or better, that the growth in the business will be at attractive margins. But as Damien has described, we're not calling when the market will start to recover. So we would expect to be achieving those outcomes as the market recovers, but are not at this time making predictions of when that will be.

As far as our customers are concerned, I mean they are depleting their stocks and they are in this phase of reducing the inventory through the supply chain. They are part of their -- one of the steps along the supply chain. We are extending contracts, renegotiating contracts that we had. We are continuing to work with them on the next stages of technology development. Actually when they're down, it's a good time to continue to improve technology and there is a lot of action going on in this area. So the commitment of our customers with our technologies remains. They have the same lack of visibility as we have as far as when the demand is going to come back.

I think then on the simplification, Jonathan, I think your question is a good one. Damien is currently leading a strategy review, has indicated that he will want to talk to the market later in the year. Of course we have ideas about how we may achieve further simplification, but I would prefer to leave it until later in the year to describe what those look like.

So can I just come back to that sort of that revenue opportunity? Sorry, I just want to get more clarity there because I think when we heard from you, last you said there was GBP 40 million. So if we sort of pro rata that on the reduced CapEx. It kind of give us a little decline to that GBP 40 million. Obviously I'm very aware that you don't want to call out a number, but is that kind of the right way of thinking about it, that we should sort of pro ratter it in terms of the CapEx decline?

Not really. I would view it as timing. So we have put in services and infrastructure. We have put in sufficient capacity to meet what we think the demand will be over the next couple of years or so and then left it in a position where as the increase in that demand becomes clearer, we can add in incremental capacity relatively easily. So that says one permutation is we end up with a programme very similar to what we originally envisaged. But that will all depend on timing of recovery in the market.

The next question comes from Harry Philips from Peel Hunt.

Just again 2 or 3 questions please. The first is in the one-off contributions in the first half. In the statement, there's a GBP 5 million gain non-recurring in carbon. Just, one, what exactly was that? And then, what was the sort of variations around one-offs non-recurring in that number. The second, sort of, I'm afraid to continue on the semicon angle, is to sort of acknowledging that GBP 7 million startup cost sort of basically I'm sort of taking that to mean there's going to be very little volume in '26. What if there's no volume in '27, just hypothetically, does that GBP 7 million remain a GBP 7 million drag or is there any mitigation even in a sort of totally flat market or 0 market? And then -- yes, that's it for now.

Harry, thank you for those. So one-off contribution of GBP 5 million, if you cast your mind back 3 years, there was in the notes to our accounts of one point reference to a dispute with a customer out of the old seals and bearings business. That was a provision of GBP 2 million at the time. We have successfully concluded the claim with that customer. In fact, the payment from them in the end was GBP 3 million. So that was very helpful. And then the balance is just an insurance receipt. So that is what they are. Clearly we call those out because they're material. Taken together. There's always a degree of one-offs like that in the business. So it doesn't mean you automatically assume that the second half will be GBP 5.5 million worse. But certainly that has had a small beneficial effect on the first half. I think your question about semicon startup cost is a fair one. Whilst we would not want to call the substantial recovery in that market, I think we'd be a little bit surprised if we weren't seeing some degree of recovery in 2027. I wouldn't necessarily expect that to be a stranded cost.

Next question comes from David Farrell from Jefferies.

Sorry to kind of continue the theme of semiconductors, but I guess kind of clearly market reacting today to that incremental GBP 7 million of dollar costs in semiconductors. If the market isn't there, why not defer commissioning of these assets to a later date when the market has recovered?

Well, I suppose, David, if we -- and by the way, the commissioning is in the second half of next year. So if we get to that period and the market is still not recovering, I suspect we won't incur the costs. So we'll assess it as time goes on.

Okay. And then just kind of follow-up question on semiconductors. Clearly kind of if we go back a couple of years, this was a really strong growth market. You're in a really strong position in terms of lack of supply into the market. We've kind of flip reversed that now. Are these contracts that you're kind of going to enter into going forward going to be lower margin because your customer has a much greater depth of supply available to it?

Yes, it's a very good, very valid question. I mean there's definitely when there is a bit more supply, there is a bit more of price pressure. However, I mean, the nature of what we do is really very core to the cost performance of our customers. And I think the main driver in this industry is that there is a significant drive to reduce the cost of the end products of the silicon carbide semiconductors. And when the design of your graphite recipients where the semiconductor is being manufactured has a significant impact on yield and on throughput, and on the capability to increase the size of the goals that you make, then the alignment of the customer with the manufacturer is quite strong. And there is honestly very few people in the industry who can achieve the quality that is required to deliver these cost reductions that the industry is seeking. So, I mean, we are very confident that we will be able to deliver good return on the investment that we've made.

The next question comes from Maggie Schooley from Rothschild & Co. Redburn.

I just have a few. On your '26 guidance, I think you well explained the overstocking in [ SiC ] and what you're seeing there and then the knock-on cost. But beyond semiconductor and other markets, is there anything that's driving that caution for '26? I'm thinking particularly of Thermal Products. And can you tell us anything that you're seeing there that we should be thinking through in terms of prolonged weakness in Thermal Products into 2026 or are you starting to see that stabilization towards the upside or any color you can give us on that?

So thanks, Maggie, for the question. So as I mentioned, we have seen an uptick, slight uptick sequentially in the core business in general of 4% and that includes the industrial, petrochemical and metals and mining businesses. So there is clearly signs of stabilization in this market. What we're doing is prudently we don't assume that this market is going to rebound significantly. In fact, we had some good activity in the U.S. in the first quarter. It's now reversed a bit. We had some good activity in Europe in the second quarter. It's kind of stalling, but however good project activity. So we're basically seeing a stabilization and we think that we don't see signs that this is going to expand and that's why we made the forward-looking statement that we made. The other markets, I mean, defence, aerospace, are going to continue. Question mark about our automotive supply business which has been impacted by the state of the industry in the first half.

And I think I recognize you've given us a clear understanding on tariffs, but there have been some semiconductor tariff announcement overnight. I don't think they affect you, but could you just comment if there's anything we need to be concerned about? And I understand it's a moving through a system and it was just announced overnight, but anything you should think about there?

I don't think so. We have briefly digested what's come out overnight. So as before, our most significant flows are, for instance, from Mexico into the U.S. Those are -- those products are covered by the previous trade agreements and are not subject to tariffs. There are relatively minor flows from Europe into the U.S. that are now subject to the 15% tariffs. But most of our products are on a factory gate pricing basis So we don't see tariffs on those either. Hence the comment that the direct impact of tariffs is to the material.

Okay. And the last one from me is that you clearly outlined that you think you're going to be down to 1.5x net into EBITDA by the end of the year. I understand the comments on working capital, but are there any other levers that we should be thinking about to ensure that we get back to that 1.5x?

Just really the combination of more steady progress on working capital, lower CapEx, lower simplification costs should get us there.

[Operator Instructions] The next question comes from [ Richard Page from Deutsche Numis ].

And just a couple of add-ons to previous questions. The mix in terms of end markets, I think clean energy and transportation, the growth in the first half, can you just give a bit more detail on that please and visibility into the second half in that market? And then secondly, just not wishing to overstress the questions on semicon, but could you just remind us the lead times you need to bring in capacity when market conditions change, please?

Clean energy and transportation is a small part of the revenue, so it's really evolving depending on order pattern, on the customer demand, etc. So I wouldn't read too much into the evolution. It was significantly high and it moved a lot from half to half.

To be honest with you, the answer to your second question is a little bit it depends. Finishing equipment is actually very quick to procure, sort of 3 to 4 months. The reason why we progressed with the bulk of the investment was it covers furnace commercially, which is it takes quite a long time to build, so something like 18 months. So there is certainly sufficient furnace capacity put in for the time being and we would be able to add in more over time.

No further questions at this time. [Operator Instructions] We have no further questions. So I hand the call back to the management team for any closing comments.

Thank you everybody for good questions. And clearly, as I said, in challenging markets, we're doing all the self-help and taking all the actions that are required. I'm very optimistic about the future of this business and its capability to get into this framework that we've set for ourselves. I look forward to sharing a bit more of this in December.