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

Welcome to the Morgan Advanced Materials Strategy Update. My name is Ian Marchant, I'm the Chair, and I'm just literally going to set the scene before I hand over to Damien, our Chief Executive; and Richard, our CFO, who I'm sure you all know. So I believe that we at Morgan have the potential to be a leading force in our chosen markets, and that's within reach. Why do I believe that? Because we've got the capabilities and clear differentiators that have been laid over the last century. It's not many companies that can look back over that length of time. And they form our strong foundations. I do recognize that the last few years has not been an easy time for the company, but we're going to set out today a clear multiyear strategy to improve operations focusing on our larger sites, improve asset utilization, drive stronger, higher-margin growth and actively manage the value of our portfolio. And the strategy will be able to enable us to unlock our potential and be a leading force in the markets in which we operate. So I'm confident in our prospects that we've got the right team to help us deliver. But actually, you don't want to hear from me, you want to hear from them. So welcome, and over to you, Damien.

So thank you, Ian, and thank you, everybody, for taking the time in being here today. It's a pleasure to have you. Everything I'm going to be talking about today is about becoming the leading force in our chosen markets. And I'm really excited to share with you our strategy on how to get there. After that, Richard will be covering the financials. We'll have some time for Q&A, and I hope some of you stay with us for informal discussions over drinks. So there are 4 points that I would like you to take away today. We're setting a clear path to achieve 12% margins by 2028. We're focusing on our right to win to drive above GDP growth at higher margins. We're executing distinctive strategic mandates for each of our divisions, and we're maximizing portfolio value to sustain 12% to 14% margins further out. Many of you are familiar with Morgan, so my introduction will be short about the company. And I won't start with products and markets. We felt it would be good to start with our impact. [Presentation]

So I hope that gives you an inspiring view on how we impact the world and how we're uniquely positioned to power progress that truly matters. And we're passionate about it. So clearly, this is a fantastic business, and we will make it even better. But before I explain how we do that, I'll just give you a quick snapshot of where we are today. So we're the global leader in advanced materials with a turnover of GBP 1 billion, a global network of 57 plants and approximately 8,000 employees. Our core capabilities for which we're well known and sought after are material science, deep application expertise and co-design and manufacturing excellence. Our customers trust us for supplying mission-critical solutions. At the core of our activity, there are technology demanding applications of advanced ceramics, graphite and carbon. These are very versatile materials. So we formulate and we process them to tune their porosity, their hardness, their electrical conductivity, their thermal and their chemical resistance, their mechanical strength and many other physical properties. And that leads us to supply around 3,000 combinations of minerals and applications. So as you can imagine, in a business like this, agility and customer intimacy are critical factors. And this is why our 3 divisions are the backbone of our operating model. They're set up to have short operational decision-making processes and to be in close proximity with our markets and with our customers. This organization also drives agility and it drives performance. The divisions have full accountability for their P&L. Let me now bring to life what we do and how we differentiate with 3 examples. Take the first example in aircraft engines, where we turn graphite and carbon into safety critical seals which have to adhere to strict aerospace standards. The simple thing -- seals, they look simple, but they're not. There is a lot of material science and process know-how that goes into them from raw material selection to mixing, pressing, heat treatment, testing and inspection. Second example is in health care diagnostics. Here, our differentiation is our ability to manufacture specialized ceramics metals assemblies to operate in high voltage and high vacuum environments. The quality of these assemblies is the critical piece to the performance and the precision of the imaging systems. The last example, I'll take a recent innovation in automotive. For combustion engines, when the new European regulations were announced, there was no ceramic fiber available in the market that was able to comply with the new limits. So within 24 months, we developed a new ceramic material to solve this problem, and we were able to crack this in time for our customers. That's because we have the material science, the rapid prototyping and the capability to test according to the industry standards. So all these 3 examples show how our closeness to our customers, our technology expertise and our ability to solve problems create value for our customers. And these collaborations create loyalty and trust for years, sometimes for decades. Another strength is that we are diversified across end markets and applications. So today, I'm sharing this breakdown of our business by market. It's a different chart to the one that you've seen before. And my intention here is to provide more clarity taking on board your feedback. And I'll refer to it in this presentation later when I'll comment on executing our strategic priorities for each of the divisions. A few things to note on this chart. Approximately 40% of our business is exposed to manufacturing investment cycles. That means that during market recovery, we grow faster than GDP. Conversely, during recession, our growth is more subdued. It's also important to understand that within these markets, there are a range of end market dynamics. If I take the example of industrial components, you have parts for water purification. You have parts for automotive, like I just mentioned. You have parts for analytical equipment. And each of these have their own market dynamics, and that contributes to our resilience. Now in addition, this diversity of end markets opens a lot of opportunities to grow. So I've talked to you about who we are, how we create value with technology and about our diverse end markets. You've seen how these key capabilities come into play to create value with the examples and how our market position are underpinned by strong and clear differentiators. I've been with the business 3 years now. And since my appointment as CEO, I've had time with all our senior leadership and our broader teams. And I've been so impressed by our winning culture. We thrive when it comes to solving tough problems. We embrace challenges, and we are resilient and united as a team. So what has held us back? There is a clear and consistent thread to where we're limiting our own progress. Our supply chains are not sufficiently effective, and they are not efficient enough either. This hold backs our service levels, constrains our growth, leaves margin on the table and above all, it distracts us from executing. We've positioned ourselves in growth markets, but we have not been sufficiently disciplined and proactive in leveraging our right to win. And we have not been sufficiently upgrading our position in the value chain to grow irrespective of market cycles. It is my priority together with the executive team and our senior leaders to address these areas and unlock our potential. We can be the leading force in our chosen markets. A successful growth agenda starts with how we can unlock our customers' ambitions and serve their needs. I had the privilege of meeting several of them, and we've also been listening to their feedback, looking at their feedback. We asked 300 of them what they thought of us and the message was consistent. Our product quality and reliability are excellent. In many cases, they are unsurpassed. However, there is a real opportunity to improve both our lead times and our delivery performance in these areas we're not best-in-class. Our customers expect better from us. We can and we will do this. As you can see to the right of the chart, the customers we survey also want a more strategic relationship with us. We have the strategic relationship with half of them already, but we have many more opportunities to build more collaborative relationships. Soin summary, our customers are telling us 2 things: Step up your game in delivery performance and move toward a more extensive, higher-value collaboration. You don't have to take my word for it. Actually, we invite you to take a moment to hear from one of our customers, John Crane. We asked Mike Eisen, their CTO, about his experience of working with us. Let's see what he has to say. [Presentation]

So what is the way forward for Morgan and how do we unlock our potential? Our strategy is simple, and we have 3 clear levers. First, we want to transform our operational effectiveness. We have a well-established and successful practice of continuous improvement. It has delivered at least GBP 10 million per year of manufacturing efficiency savings. We will now go beyond this. We'll be more holistic, and we will leverage our group scale to transform our operation effectiveness. And we will address the performance of a few large underperforming sites. These actions will improve our costs, and they will help us grow. But to really drive stronger growth, which is our second lever, we need to be more proactive and programmatic in strategic collaborations with our customers and other stakeholders in the value chain in order to expand our value proposition. And we need to focus our efforts where we have the strongest right to win and consistently upgrade this right to win so that we can grow irrespective of market conditions. Our third lever is to maximize our portfolio's value. We've carried out a thorough review of our products and applications with a focus on assessing the market attractiveness and the strength of our right to win. We will actively manage our portfolio and pursue bolt-on M&A to support and accelerate a step change in market position where there is a clear opportunity or where we determine that we're not the best owner for the business, we'll seek to divest. So let's now look at these levers in detail, and I'll start with operational effectiveness. This is all about making more of the group's scale and of its digital transformation. There is a significant opportunity in procurement, which is currently the responsibility of individual sites or business units. In the past few months, we've collected and consolidated data at group level, and we have determined where to focus our efforts. We've also implemented information systems to provide real-time consolidated insights about our spend. We can now deploy group-led category management. Initially, we will target GBP 170 million of indirect procurement spend. This will deliver significant savings and reinforce the reliability and the efficiency of our supply chain. We're also implementing transformation plans for underperforming larger sites that represents around 20% of the group revenue. These are structured, comprehensive multiyear programs. They focus on the optimization of the production cycles, the simplification of the asset base and of the product lines. Together, these actions, which are in addition to our existing programs of continuous improvement, will deliver EUR 20 million margin improvement by 2028. We're also investing in the digital transformation of our back office. All administrative activities will be done through standardized processes to ensure consistent service reliability at the optimal cost. We've already implemented change in selected countries in accounting and in payroll. The pace will accelerate with the deployment of our centralized ERP system. This transformation will enhance our business analytics. Our decisions will be better informed. Margin improvement opportunities will be identified faster, and we will be more agile. I want to be clear, these are not simply cost improvement projects. They support and they enable growth. They make our business more scalable, and they allow us to leverage that scale. So let's talk now about how we're going to drive stronger growth. Here, it's about leveraging our right to win and constantly upgrading our position in the value chain. We're doing this already, and that's why we know that it works and that it creates value. Our strategy is to do this in a proactive and programmatic way. I'll give you 3 examples. The first is where we can develop the scope of our supply from a single component to a multifunctional subsystem. Imagine the rail system in North America in winter. You have arctic temperatures, freezing pantographs. If you're the operator, you don't want electric current to be passing through ice. So what you typically do is you purchase a heating system from a specialist engineering company and you bolt it on to the pantograph. We developed a heating system to be integrated into the collector strip for one of our customers, RTD-Denver. Now the collector has become a higher-value subsystem. It simplifies sourcing and maintenance activities. We've sold it to other operators, and we are developing similar system upgrades for other customers. The second example is our ability to co-develop a technology that enables game-changing advancements of the end product. We're doing that -- we've been doing that in aerospace, where we developed a new process and material solution that allows our customers who are the engine manufacturers, they are specialized casting house to generate complex cooling channels in the turbine blades and veins of a modern jet engine. These more effective cooling channels are a critical enabler of the higher fuel efficiency of new generation engines like GE's GenX Series, Safran's LEAP engine and Pratt & Whitney's geared turbofan family. A third example is where we established a right to win via structural partnership along the value chain. We're seeing that in fire protection in the UAE, where the enforcement of a more stringent building fire regulation has created a compelling value for our ceramic fiber technology. We can't sell this ourselves. We don't have the network. So we're joining forces developing, marketing and scaling up this a new compliant DUC system with leading fabricators who are local, well established and operating at scale with building companies, engineering houses, architects. These are just 3 examples of how we're strengthening strategic relationships to drive stronger growth. We're now being more proactive and more programmatic on these opportunities. Here is how we've decided on our focus as we do this. As I said, we've carried out a thorough review of our products and applications with a focus on establishing the market attractiveness and the strength of our right to win. This systematic approach is new to Morgan and is already driving decisions in our business. We determined that our crucible business was in an end market that was relatively less attractive to us and that there was not enough potential for us to enhance its right to win. We sold the business. In Semicon, we're making a clear distinction between material growth and wafer fabrication, which are 2 different parts of the value chain with very different dynamics. For material growth, although there is a large and growing market, especially in silicon carbide, the supply chain is experiencing a shift to China. We remain committed when the market returns to supply our customers in the U.S. and Europe. The highest purity products, which we provide them are critical to the differentiation of their materials, but we have adjusted our growth expectations, and we are redeploying some of the new capacity to other markets. We're focusing on the wafer fabrication part of the value chain. It is dominated by American, European and Japanese OEMs and the barriers to entry are high. We're supplying most of them, ASML, Applied Materials, [indiscernible] Lam in various parts of their process. Our goal is to deepen our collaboration, working as one enterprise and expand the scope of our supply. You will see other examples of these portfolio choices I come on to talk about our divisional priorities. So let me recap shortly on our 3 strategic levers. We're taking transformational steps in operational effectiveness by leveraging our scale in supply chain and back office and by focusing on fixing a few large underperforming sites. We will rely less on the underlying growth of our markets. Instead, we will drive margin-enhancing growth through a much stronger alignment with our key customers and channel partners. We're shaping our right to win and optimizing our position in the value chain to maximize our portfolio value. What I want to do now is to provide some color on the implication of this strategy and its practical implementation for each of our 3 operating divisions. I'll start with Thermal Products. In Thermal Products, the majority of sales are in process industries, which are mature, more competitive cyclical markets and currently at a trough. We set the benchmark in these markets in installation standards, and we benefit from a large installed base. So the objective for this cash-generative division is to optimize cost, enhance delivery performance and expand in high-value segments. In transforming operational effectiveness, Thermal Products already has a strong track record in deploying the best manufacturing practices across its global network. An additional focus now is on asset utilization, which is targeted to improve significantly already in 2026. We also have a phased program in progress to turn around the performance at our largest site, where we expect progressive improvements in revenue and margins to continue over the coming 3 years. To drive stronger growth, we're reinforcing our outreach in the process industries to enable the decarbonization of steel and chemical processes. For example, we've been selected by one of the largest petrochemical plants in North America to supply insulation for the construction of their low-carbon plant. To maximize value, we have set up structural partnerships in fire protection. This is a very large market, and we're targeting the geographies and the applications where the value proposition is compelling. The mandate for Thermal products is to deliver GDP growth and sustained 8% to 10% margins. In Performance Carbon, our products are critical to pumps, motors, generators. They are essential components that form the backbone of many industrial systems, and we have a large installed base. We're also in highly regulated markets such as aviation, rail, defense, and this provides a high barrier to entry. Our leadership position across these markets underpins our high margins. The objective here is to constantly renew our differentiation, extend our leadership in mature markets and expand the addressable market. As part of our transformational program, we're improving our lead times and enhancing our ability to serve the aftermarket. Our teams are already pushing here. To drive stronger growth, we're capitalizing on our reputation and innovation in armor by expanding to other defense systems. We're adding incremental capacity next year to fulfill multiyear contracts. And as we maximize our portfolio values, industrial seals is a significant opportunity. The supply chain is very fragmented and can be optimized for efficiency. There are new technology demanding applications driven by the decarbonization and digitalization trends, which call for innovation as we've heard from John Crane. And we're exploring ways to move parts from parts to subsystems as we've done in other markets. Remember the pantograph. The mandate for Performance Carbon overall is to deliver GDP plus growth and sustained 14% to 18% margins. In Technical Ceramics, we're positioned in large, attractive markets like aerospace, defense and health care, and we hold leadership positions in specific niches that can be leveraged for adjacencies. The objective of this division is to optimize the manufacturing network, bolster our leadership positions and grow our market share. We're transforming operation effectiveness by rebalancing production among sites and optimizing the capacity and capabilities and costs across the networks. Driving stronger growth starts with extending our leadership position in ceramic cores for engines in the aerospace and defense market. We understand our customers and their customers as well, and we're investing in capacity to meet the progressive ramp-up of aircraft deliveries in the midterm. In maximizing our portfolio value, we're leveraging our expertise in high-value niches to expand into new adjacencies with priorities in industrials and aerospace. Across our divisions, we see the largest revenue growth potential for technical ceramics. The mandate for this division is to target 12% to 16% margins. Lastly, I want to give you a sense of the time frame. In the near term, we will benefit from the initiatives, which are entirely in our gift to execute, leveraging the group scale and digitalization for cost and efficiency gains, increasing our market share by improving delivery performance and with additional channel partnerships. Together with the drop-through from a modest market recovery, we target 12% margins by 2028. Beyond that, we will reach 14% through building on leadership positions to expand into adjacencies, deepening our position in the value chain and portfolio management. This strategy provides us with a clear road map to be the leading force in our chosen markets. We have the right structure, the right team to execute this agenda. I will now hand over to Richard.

Thank you, Damien. In this part of the presentation, I'm going to convey 4 important messages. We have a clear path to a 12% sustainable operating margin by 2028, driven by our focused strategy and self-help actions. We have a clear capital allocation policy with a near-term focus to invest in the businesses outlined, continue to pay our dividend and to reduce leverage within our stated range of 1 to 1.5x. We have strong conviction that cash conversion will improve as investment normalizes, providing the opportunity for additional investment and returns in due course. And we have updated our financial framework to reflect the opportunity for value creation as well as the reality of our end markets. In thinking about our margin target, we have taken a cautious approach with regard to end market recovery and are not planning for a recovery until late 2026. We will, therefore, move into our target margin range predominantly through our own improvement actions, which gives us confidence in our financial framework. Of course, if end markets recover faster, the work we have done to reduce our manufacturing cost base over the last 3 years, coupled with our planned optimization opportunities, gives us the opportunity to accelerate that margin improvement via a healthy drop-through. Taking the consensus expectation for the second half of 2025 of 9% as the starting point, there are 3 drivers of a return to 12% that deliver in approximately equal proportions and which mainly require us to execute action plans that are in our own control. We will firstly build on our track record of continuous improvement, which has, on average, generated net savings of at least GBP 10 million per annum by delivering more substantial benefits from our transformation of supply chain and procurement. As you can see from Damien's presentation, we do have a lot to go for. We will also, in this period, start to benefit from our investment in digitalization and back-office transformation. Secondly, having nearly completed our rationalization of manufacturing sites for the time being, we will focus on turnaround plans for a number of sites where performance is suboptimal and where there is the opportunity for margin enhancement once performance has been improved. Thirdly, we do anticipate some benefit of sales growth. This will partly be from an element of market recovery, but Damien has also spoken of the opportunity to grow in focus areas where we have a strong right to win. So growth in the near term will be as much about good execution as about market recovery. Beyond 2028, operational effectiveness will drive further margin expansion with the benefits of digitalization and back-office transformation accelerating through improved planning, forecasting, customer service and transactional efficiency. Then we expect continued growth in the focus areas that we have described, which will be margin accretive. Finally, Damien has referred to the growth opportunity from proactively managing our business portfolio. This will involve much more precise capital allocation to accelerate organic growth, along with partnerships and bolt-on M&A. And whereas any time we find we have businesses that don't meet the requirements of our financial framework, we will not hesitate to divest them as we did with MMS. In terms of margin impact, we anticipate the need for some benefit from this activity to get us to 14%. But given the growth potential and accretive margins in a number of our end markets, there is the potential over time for margin to progress even further. Moving on to capital allocation. We are fully aware that the decline in our EBITDA, combined with the need to complete our investment in semiconductor capacity, albeit cut back, has resulted in our leverage moving above our target range. We are focused on correcting that, and we'll bring leverage to around 1.5x over the next 2 years. Our target leverage, therefore, remains in the 1 to 1.5x range in relation to ongoing operations. And as before, we would consider increasing this in due course into the 1.5 to 2x range in the event of a compelling acquisition. Whilst organic capital investment remains a priority in support of organic growth opportunities, we foresee limited needs for capacity investment and expect to be able to maintain overall CapEx at around 1.2x depreciation. We will maintain the dividend for now, then grow it in line with adjusted earnings once cover returns to around 2.5x. However, in the very short term, we will prioritize stabilization of the balance sheet as we go through the current downturn as well as our organic investment and we'll pause our buyback following completion of the current tranche. Once stabilized, we will consider the need to fund inorganic investment alongside additional returns to shareholders. The Board will review this situation regularly, recognizing the opportunity that additional returns present to return cash to shareholders and enhance earnings. The outcome of these measures can be seen in our cash flow forecast. On the left-hand side of the chart, you can see the forecast for the next 2 years, reflecting our short-term focus on stabilizing the balance sheet. We have allowed for a modest increase in EBITDA in line with analyst consensus over the next 2 years. We're also allowing for GBP 45 million of receipts from the sale of our shares in Foseco India, mainly during 2026. As well as reducing our capital expenditure, we're coming to the end of our restructuring program, allowing exceptional costs also to wind down in 2026. We are investing in a digital transformation, firstly, in the form of our ERP, whilst also embracing new data analytics and data management capabilities that are enabling better decision-making and business management. We expect that to continue at around GBP 20 million per annum until the second half of 2027 when we will have completed our ERP program. We will keep dividends stable and pause the buyback. Taken together, these measures give the opportunity for leverage to come down steadily as EBITDA improves. Then once we've achieved that steady state, we anticipate achieving a good level of free cash flow conversion at around 65%, giving the opportunity for meaningful further investment and/or returns to shareholders. As noted, we expect our capital expenditure to stabilize at around GBP 50 million to GBP 55 million a year or 1.2x depreciation, having completed our investment in semiconductor capacity. This will allow for investment of around GBP 28 million in new capacity in line for our strategy over the next 3 years, focused on those opportunities where growth is already evident and where we have a strong right to win. We would then expect maintenance CapEx to remain at around 1x current depreciation. It is worth noting that this does reflect one benefit of having closed 26 factories between 2016 and 2025, and that our need for maintenance capital has diminished over time, leaving scope for future investment in capacity should growth require it. Finally, I will sum up with our updated financial framework. Damien has spoken of the strategic mandates for our segments with Technical Ceramics and Performance Carbon expected to grow ahead of GDP, whilst Thermal Ceramics will be slightly below. Overall, we expect our growth over the next few years to amount to some 1 to 2 percentage points ahead of GDP. Our margin target is to achieve 12% to 14%. This is largely based on transformational measures we can undertake ourselves with a cautious element of market recovery also assumed. Our target for return on invested capital remains in the 17% to 20% range. Our target leverage range also remains the same. And once stabilized, we would aim to keep leverage in the 1 to 1.5x range in relation to ongoing operations and would consider increasing this into the 1.5 to 2x range in the event of an acquisition. Our ambition then is to achieve sustained growth in adjusted EPS through above GDP organic revenue growth, a greater focus on self-help from operational excellence and portfolio optimization, then enhancing returns to shareholders as appropriate. Thank you, and I'll hand back to Damien for concluding remarks.

Thank you, Richard. I'm going to conclude with our 4 key messages. We're setting a path to achieve 12% margins by 2028. We're focusing on our right to win to drive above GDP growth at higher margins. We're executing 3 distinctive mandates for each of our divisions, and we're maximizing portfolio value to sustain 12% to 14% margins further out. Thank you.