Morgan Advanced Materials H2 2024 Earnings Call Transcript

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February 28, 2025

There are 7 speakers on the call.

Operator

I will now hand over to Pete Raby, Chief Executive Officer to begin. Please go ahead.

Speaker 1

Thanks very much, Lucy. Good morning, everyone. As I said, 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 preliminary results call for 2024.

Speaker 1

I will start with a summary of the results. Richard will then take you through the financial position and I'll then cover the segmental drivers, non financial metrics and the outlook. In 2024, we delivered revenues of billion and organic revenue growth of 3.7% with 7.6% growth from our faster growing market. In light of the trading conditions, we've accelerated our restructuring program and will now deliver run rate savings of GBP 27,000,000 a year from 2026 for a one off cost of GBP 45,000,000. Group adjusted operating profit was GBP 128,000,000 and operating margin of 11.7%, up 90 basis points.

Speaker 1

Pricing and continuous improvement continued to more than offset inflation and we achieved $8,000,000 of benefits in the year from our restructuring. Cash generated from operations was up 29% reflecting good working capital management. Gross capital expenditure was GBP 90,000,000 as we invest in capital, so as we invest in capacity for our core and for our faster growing market. Net debt to EBITDA is within our framework range at 1.4x. We also reduced scope one and two CO2 emissions by a further 3% during the year.

Speaker 1

Our share buyback program is progressing well with the second tranche of GBP 10,000,000 to commence immediately on the completion of the first tranche. I'll now hand you over to Richard to take you through the financial results.

Speaker 2

Thank you, Pete, and good morning, everyone. I'm going to start with an overview of the financial results to the thirty one December twenty twenty four. Revenue at billion was 3.7% higher than prior year on an organic constant currency basis. This was driven by pricing that accounted for around 5%, partly offset by a small overall volume decline. As previously announced, we did see further weakening in our industrial end markets during the second half such that having seen volume growth of around 3.5% in the first half, volume declined by around 6% in the second.

Speaker 2

Revenue growth in our faster growing markets was 7.6% driven by encouraging growth in clean energy, clean transportation and healthcare. We did also see slight growth in semiconductor for the year as a whole, but would note that revenue declined in the second half by around 10% compared with the same period in 2023 as a consequence of the slower growth in battery electrical vehicle sales and consequent impact on customer inventories. Group adjusted operating profit was GBP 128,400,000.0, an improvement of GBP 18,200,000.0 or 16.5% on an organic constant currency basis. Adjusted operating margin was 11.7% and return on invested capital was 18.5%. Cash generated from continuing operations was million and free cash flow an inflow of GBP 15,000,000, both showing an improvement over last year and benefiting from further working capital improvement.

Speaker 2

Adjusted EPS was GBP 25.5 per share and we have increased the dividend for the year from 12p to 12.2p. Specific adjusting items amounted to £23,100,000 for the year. Turning now to the profit bridge. We can see the benefit of our restructuring and efficiency savings that has served to more than offset the impact of the volume decline and give us a substantial underlying profit improvement at constant currency. The volume decline led to the profit impact of around GBP 11,000,000 influenced by the second half decline in higher margin semiconductor volume.

Speaker 2

Pricing of 5% was mostly offset by inflation of 4% and we again delivered substantial efficiency savings this year. This follows the work done by the businesses in 2023 to recover from the cyber incident, which effectively gave another GBP 15,000,000 of efficiency improvements in the first half. Incremental restructuring savings amounted to GBP 8,000,000 and I will come on shortly to our forward view of benefits for 2025 and 2026. Finally, FX had a GBP 10,100,000.0 negative impact on adjusted operating profit with a number of currencies having weakened against earnings during the year. At constant currency, the overall profit improvement was GBP 18,200,000.0.

Speaker 2

Moving on to cash flow. I would firstly note that the working capital cash inflow of GBP 14,600,000.0 resulting from continued improvements in all aspects of our working capital management. Net capital expenditure amounted to GBP 90,200,000.0, an increase of GBP 31,700,000.0 compared with 2023, and which included GBP 36,000,000 of capacity related investment. Lease payments and other items increased by GBP 4,100,000.0 due to GBP 2,000,000 in non cash movements and GBP 2,000,000 in increased lease payments and interest. Cash flows relating to exceptional items totaled GBP 18,600,000.0, a reduction of GBP 9,900,000.0 due to the cost of the cyber instance having been incurred in the prior year.

Speaker 2

Free cash flow before dividends was therefore an inflow of GBP 15,000,000. Net debt finished the year at GBP 2,000,000 excluding these liabilities representing 1.4 times EBITDA. We've included our usual summary of our funding profile in the appendix. We announced in November that our simplification program has been expanded such that we expected to deliver GBP 22,000,000 of annualized savings by 2026 with exceptional costs of GBP 45,000,000. In response to the weak market conditions experienced later in 2024, we have further expanded the program, such that we expect to deliver around GBP 27,000,000 of savings by 2026 for the same exceptional costs.

Speaker 2

We expect those costs to have been substantially incurred by the end of twenty twenty five and the program completed in early twenty twenty six. There have been a number of site closures contributing to this program as we work to improve the efficiency of our manufacturing footprint. Overall, our manufacturing sites have reduced from 85% to 60% over the last ten years, a reduction of 29%. As previously announced, we simplified the group structure into three segments and have also carried out back office and other rationalization. We expect the program to deliver GBP 16,000,000 of incremental savings in 2025, which together with our ongoing efficiency improvement activities will underpin a return to a 12.5% margin during 2025.

Speaker 2

On this next chart, I've shown a breakdown of our twenty twenty four specific adjusting items of GBP 23,100,000.0. We have chosen to follow established practice in treating the design configuration and implementation costs associated with the rollout of our ERP system as adjusting items. These amounted to GBP 5,200,000.0 in 2024 and are expected to amount to around GBP 10,000,000 in each of 2025 and 2026 before tapering off during 2027. Restructuring costs associated with our simplification program amounted to GBP 13,100,000.0. Other adjusting items principally comprised an impairment of GBP 4,200,000.0 in relation to the thermal products business in Europe, which was particularly affected by the weakening in industrial end markets during the second half of the year.

Speaker 2

In the light of the slower than expected growth in battery electric vehicles, we have scaled back our investment in semiconductor capacity for the time being compared with our previous projection of GBP 100,000,000 spend over the years 2024 to 2026, we now expect to have spent around million over the same period. Based on latest market projections, we still expect healthy near term returns with around million of revenue and million of profit in 2027 to give a 20% return on investment. We will then be well placed with infrastructure in place, headroom available to make further capacity investments in line with demand growth. Our guidance for other capacity investments remains unchanged at million over the period, and we've been able to trim our forecast for maintenance expenditure slightly as a consequence of having closed a number of sites. Overall, we expect capital expenditure of around GBP 90,000,000 in 2025, GBP '60 '5 million in 2026 and GBP 60,000,000 in 2027.

Speaker 2

This reduced level of spend will give us the flexibility to invest in other opportunities in due course. Finally, moving on to technical guidance. Capital expenditure for 2025 will be around GBP 90,000,000 as noted. Together with this elevated capital expenditure and our ongoing buyback program, we would expect net debt to increase slightly, albeit remaining within our guidance range of $230,000,000 to $250,000,000. We would expect year end leverage to be in line with 2024 of around 1.4 times.

Speaker 2

As before, we expect our net finance charge to remain in

Speaker 1

the GBP 18,000,000 to

Speaker 2

GBP 20,000,000 range and our adjusted effective tax rate to continue in the GBP 20 6 percent to 28% range. Our dividend policy remains for cover of around 2.5x. Whilst we have been below this in 2023 and 2024, we would expect to progress back towards target cover during 2025 and 2026 as markets recover. We have shown an FX sensitivity chart at chart 27. Whilst there has been a favorable movement in sterling versus the U.

Speaker 2

S. Dollar since the start of the year, sterling has strengthened against a number of other trade incursions such that we do expect a small overall headwind for the year. Thank you. And I would now like to

Speaker 1

hand back to Pete. Thank you, Richard. I'll now take you through our segmental performance. The performance of our business units, progress on our non financial goals and then the business outlook. Slide 13 shows the organic performance in our major market segments split between our faster growing segments and our core.

Speaker 1

Our faster growing segments were up 7.6% in the year, driven by healthcare, clean energy and clean transportation. After a multi year period of semiconductor market growth, semiconductors was broadly flat for the year. The market declined in the second half as customers in the silicon carbide power electronics market canceled orders reflecting slower than expected electric vehicle growth and I'll cover that in a little bit more detail shortly. Healthcare grew 9% driven by feed throughs for implantable medical devices. Clean energy and clean transportation delivered strong growth with a 19% increase over the prior year.

Speaker 1

This was driven by ceramic products for solar panel manufacture and carbon products for electrified rail. Moving to the core, transportation grew 4.5 with aerospace as a driver, air traffic volumes. Aerospace was up 13% in the year. Chemical and petrochemical grew modestly reflecting thermal product activity sorry project activity and aftermarket sales. Security and defense grew 11% with growth in armor, in night vision components and in wider defense applications.

Speaker 1

Industrial and Metal sales declined 0.7%, reflecting weak upmarket demand in all regions and in particular in Europe and in The Americas. Turning to our business segments. Each of the global business segments made progress on margins during the year with good cost management in the face of weaker end market demand. Thermal products declined by 0.6%, reflecting the higher exposure to industrial and metals markets globally. Industrial and metals markets account for over half of thermal products revenue.

Speaker 1

Margins improved by 0.8 Performance carbon grew 9.3, another strong top line performance, driven by the faster growing segments and Aerospace and Defense. Margins expanded by 0.7%. Technical ceramics grew 3.7% driven by the faster growing segments and growth in ceramic cores for industrial gas turbine. Margins expanded 0.8. Turning to our non financial performance.

Speaker 1

Slide 15 shows our progress in reducing scope one and two CO2 emissions since 2015. Our CO2 emissions in 2023 were down 3% on the prior year with progress on energy efficiency and further low carbon 75% of our electricity now comes from green or carbon free sources. We've reduced our Scope one and two CO2 emissions by over 50% in 2015 and we're on track to meet our 02/1930 goal even with the growth in the business to come. Our water usage reduced 6% during the year with efficiency measures driving the improvements. Water usage in stressed areas increased by around 1.6% with growth in some stressed regions such as Mexico and some changes in product mix.

Speaker 1

Our safety performance improved further with a lost time accident rate of 0.13 compared to 0.19 in the prior year. We continue to have a high degree of focus on safety and we'll continue to work on behavioral safety and process safety in 2025. From a diversity perspective, our full year position is 34% of our senior leaders being female, further improvement on the prior year. And this is receiving a high level of focus across our leadership team as we look to make further improvements in the next few years. And then finally turning to engagement, we completed our engagement survey during the year and recorded a 52% engagement level.

Speaker 1

That was a 1% decline on the same population in the prior year. While that's a reasonable result given the challenging backdrop, we have got much to do here and we're working very hard to drive sustainable improvements with a lot of focus across our business. So turning to semiconductors, 10% of our revenues come from the semiconductor market and this is a growth market for us. Our semiconductor revenues have almost doubled over the last four years. Around half our sales are driven by silicon carbide power electronics for electric vehicles and for power management and half are driven by chips production in conventional 24, the growth in electric vehicles, the key end market for silicon carbide power electronics was slower than expected by the industry.

Speaker 1

The graph shows the growth in EVs expected in 2023 and the growth expected today. There's a delay of a year or more getting to the same volumes that were expected eighteen months ago. We've also included here an estimate of the conversion rate from electric vehicle volumes to volumes for our consumables. There are a number of factors that influence this. So that's wafer sizes, wafer yields, electric vehicles with silicon carbide electronics as well as the furnished configuration at our customers.

Speaker 1

Taken together, these give a conversion rate of 0.4 to 0.7 times. In other words, if there's a 10% growth in electric vehicles, we would expect a 4% to 7% growth in demand for our products. In 2024 and through this year, the overproduction of wafers in the value chain has led to a slowdown in sales for our consumables. We expect this inventory to be consumed during 2025 with growth returning in 2026. And we remain confident about the prospects for the business here.

Speaker 1

Electric vehicles are continuing to grow. Silicon carbide power electronics are increasingly attractive solution for those vehicles, especially as the price of those devices fall. And we will continue to invest here and we expect to reinstate our capacity investment program as the demand grows. Looking at our markets overall, our guided growth ranges are unchanged. These are three cycle ranges and while we see declines in some markets in the near term, we don't think the fundamentals have changed.

Speaker 1

We expect our faster growing market to grow with a CAGR of 10% to 15% driven by power electronics and digitization, growing demand for healthcare and the energy transition. In our core, we expect aerospace and defense, India and fire protection to grow at a 5% to 8% CAGR. Our traditional industrial metals, oil and gas and transportation markets will grow at 2% to 4%, broadly in line with industrial GDP. We have a disciplined approach to delivering improving growth and returns and this is captured in our financial framework. Our targets are for through cycle organic revenue growth of 4% to 7% per year, 12.5% to 15% EBITDA margins, 17% to 20% ROIC and leverage of one to two times and one to 1.5 times absent M and A.

Speaker 1

Taken together, these all contribute to enhanced EPS growth for the group. In November of last year, we announced a GBP 40,000,000 share buyback program, reflecting the absence of M and A in the short term and the strong balance sheet, and that buyback is ongoing. Looking ahead to 2025, European and Chinese industrial and metals markets are weak and we expect those to be a headwind, partially offset by The U. S. Where we do see some signs of improvement.

Speaker 1

Semiconductors

Speaker 2

will

Speaker 1

also be a headwind given the stronger H1 last year and the weakness in the silicon carbide power electronics market, which is expected to continue through 2025. While Clean Energy and Transportation, India, Aerospace and Defense are expected to grow, these segments won't fully offset the declines in industrial and semiconductor markets. And as a result, we expect revenues to be down mid single digit compared to the prior year. With the self help we're pursuing through our restructuring program, we expect margins to be back within the range. We've not included any impact from tariffs in our guidance.

Speaker 1

These are very fast moving. There are a lot of different jurisdictions being discussed and without understanding the details of proposals it's difficult to assess the overall impact. So just to summarize, we've grown revenue 3.7% with 7.6% growth in our fast growing market. Our margins were 11.7% and we've accelerated restructuring actions and expect to deliver GBP 24,000,000 of restructuring savings in 2025. We slowed our investments in the semiconductor market reflecting weaker near term demand.

Speaker 1

We remain very confident in the longer term potential here and we expect to resume capacity expansion once the current oversupply of silicon carbide wafers is eliminated. We have a strong balance sheet enabling us to fund our organic investment and in due course M and A and our share buyback is progressing well. Our expectation for the full year is revenues mid single digit below 2024 with equal H1 and H2 and margins back in the range. We've done a lot to optimize the cost structure and operational footprint of the business over the last five years. We have a much leaner site footprint with production focused in our more efficient plant.

Speaker 1

We've also developed attractive growth opportunities for the group and we're very well placed to grow quickly and to expand margins and cash flows as volumes recover. Thank you. That ends our formal presentation. We'll now take questions and I'll hand you back to the operator to coordinate that.

Operator

Thank We have a question from Jonathan Hern of Barclays. Jonathan, your line is now open. Please go ahead.

Speaker 3

Hey, guys. Good morning. Just a few clarification questions from me, please. So, Anthony, just in terms of your clean energy exposure, can you just give us a feel how much of

Speaker 1

that is into The U. S?

Speaker 3

And within that, how much of that is wind? Just some color there would be helpful. The second one was just on that new capacity that's coming up in semicon, that $40,000,000 Can you just update us on that, about how much of that capacity is currently sold out? And is there options for the customers who may be taking that capacity to defer? And then the third one was just in terms of that $16,000,000 of incremental benefits coming through on the cost savings plan in 2025.

Speaker 3

Can you just remind us of the H1, H2 split in terms of that sort of savings profile, please? Thank you.

Speaker 1

Sure thing. One morning, Jonathan. I'll take the first two and I'll ask Richard just to pick up on the phasing of benefits. So clean energy in The U. S, just over half of our clean energy exposure is in The U.

Speaker 1

S. About a third of clean energy in total is in the wind segment. In terms of the semi comp capacity, so we do have forward contracts covering some of that volume. We are in the process of renegotiating those with customers just given the slowdown. So at this point, it's probably a 20% or so level of coverage that we've got for 2027.

Speaker 1

My expectation is that will pick up as we see volumes improving. Richard, on the basing of the benefits.

Speaker 2

Good morning, Jonathan. Fairly evenly phased, but with a slight weight in the second half. So of the order of seven in the first, nine in the second.

Speaker 3

Great. Very clear. Thank you.

Operator

Our next question is from Harry Phillips of Peel Hunt. Harry, your line is now open. Please go ahead.

Speaker 4

Good morning, everyone. A couple of questions, please. Just thinking about thermal and obviously, it had a very soggy back end to the year running into the current year. And obviously, the definition of thermal has changed a little bit, but you can still track it back. It's just where do you think in normal sort of circumstances, what is the right sort of level of margin in that business?

Speaker 4

Because it sort of gets to an incisive way you think it ought to be and then something happens within the portfolio to just sort of nudge it away. And I'm just wondering, is there some is it just a sort of mix or is it competition? I'm just trying to understand why it never quite sort of makes over divide, if you like. And then secondly, on the cost saving and probably a self answering question. Obviously, you've added more cost savings for the current year well, to the program as a whole.

Speaker 4

Is that based on the sort of current outlook assumptions if the outlook were to dip again, is there more scope against that environment to respond with more action in that particular area, please?

Speaker 1

Sure. Good morning, Harry. Good morning. So on thermal, so I'd see the margin for that business 10% to 12% is the right sort of range. You're right, it's been a challenging few years for that business.

Speaker 1

The primary impact is demand, Harry. I wouldn't say I don't think we would say there's any meaningful difference in competition, honestly. That landscape is pretty stable, perhaps an exception in China where that is just naturally a bit more competitive. But even there, I don't think we're seeing particular growth in new competitors. So that's just a sort of static position.

Speaker 1

The big impacts have been obviously some level of deindustrialization in Europe over the last two or three years with high gas prices that impacted certainly the German and to some degree the European industrial base and we support high temperature processes where for the gas is fuel. So that's been a little bit of a headwind in those markets. And then in 2024 and I think into 2025, China is also sort of slower for us. We do about $100,000,000 a year in China, probably two thirds of that is thermal related activity and sentiment there has been very weak. So you have the sort of the volume challenge and we've obviously taken cost out to manage that, but that's what's been putting pressure on margins over the last sort of couple of years or so.

Speaker 1

In terms of sorry, go on. So I

Speaker 4

was just saying, but in terms of sort of product line up within the business, is that sort of basically say, I mean, I imagine each product sort of evolved, but in terms of has the mix within it sort of changed considerably in recent years or it is just comes back to that simple demand factor?

Speaker 1

So the answer to that is sort of no and yes. So we're still you could still think of it as sort of roughly speaking half the volumes are fiber related products and then the balance is sort of engineered products of one sort or another fiber expired shapes, those kinds of things. Of that product set though, we've got different fiber chemistries, we've got more sophisticated products for fire protection. So the products are evolving, albeit with the same underlying materials. On the cost out restructuring, so we have accelerated that as you noted.

Speaker 1

We've got more costs coming out this year and a higher total for the program. We've got in there what we see as the right set of actions for now. Obviously, we will continue to look carefully at the market and the evolution. And if we see that changing, then we'll reflect on whether some further actions are appropriate.

Speaker 4

Our

Operator

next question is from David Farrell of Jefferies. David, your line is now open. Please go ahead.

Speaker 5

Thanks. Good morning, guys. Two questions from me as well. Just in terms of the buyback, I just wondered if market deterioration got worse. I mean, it looked as if you were going to push through the 1.5 times net debt to EBITDA level, whether or not that would just all pushed out?

Speaker 5

And then my second question was, if I look at kind of the performance in conventional transportation, for the full year, you're up 4.5%. At the first half, you're up 19.2%. So that signifies that there's been quite a significant drop off somewhere. Aerospace, I imagine, has been okay. So maybe just kind of go into a bit of detail in terms of the half on half moves in conventional transportation, please.

Speaker 1

Sure. Let me pick that one up and I'll let Richard comment on just sort of the buyback. I think, David, you broke a little bit. I think your question was around sort of leverage and how that plays into our thinking or the board's thinking on a buyback. Is that right?

Speaker 5

Yes, that's exactly right. If markets got worse and it looked like you would breach 1.5 times, would that trigger the buyback being pushed out?

Speaker 1

Okay. Thanks. All right. So just starting on the conventional transportation. So yes, the pieces that sit within that, you've got effectively sort of like conventional automotive, you've got rail exposure and you've got aerospace which is aviation and space.

Speaker 1

The piece that I think had the biggest impact in the second half is actually space. That's quite lumpy for us. It's just the nature of how those customers buy. So they buy sort of braze materials and ceramic materials and vary through the year until we just saw more of that order intake in the first half of last year. I think there was a little bit of weakness in conventional automotive and rail just reflecting sort of slowing industrial economies as well, but that a positive piece.

Speaker 1

Richard, on the buyback?

Speaker 2

Morning, David. We are, of course, cautious around cash flow at the time of weak market conditions. We expect the second tranche to progress at a slower pace than the third tranche. So you can anticipate that something like 50% of the overall GBP 40,000,000 program will be completed by the end of the year.

Operator

Our next question is from Maggie Schooley of Redburn Atlantic. Maggie, your line is now open. Please go ahead.

Speaker 6

Thank you. Good morning, Pete. Good morning, Richard. How are you? I just had one question.

Speaker 6

Some of your competitors are talking about pricing pressure or relatively significant pricing pressure in SIC. Can you just delve a little bit deeper on what gives you the confidence that that circa 20% return can be achieved on your investment even albeit paired back over the next couple of years? And are you seeing conversely that pricing pressure perhaps opening up other applications for SIC that might have been priced out previously?

Speaker 1

Sure. Good morning Maggie. How are you? Yes, so on the price pressure point. So, yes, I don't think we're seeing particularly significant price pressures there.

Speaker 1

What I would say, we enable that process and our products have a sort of significant impact on the yield that our customers get. So actually what we're trying to do is to produce better products that nudge their yield up. So if they're getting incremental yield improvement, clearly that drives a massive reduction in the cost per device, cost per wafer for them compared to the sort of input costs of our materials. So that's sort of largely how we're managing that. As I sort of commented when thinking about that sort of conversion factor from EVs to our wafers, the wafer size is an obvious point.

Speaker 1

So if you go from a six inches wafer to a nine inches wafer, you are getting sort of 70% more devices for a given run of a furnace. So again, you get a dramatic reduction in cost per unit and you would in principle, while our consumables will be slightly bigger physically, you're getting more pieces out. So I think that's why we are working hard on the sort of differentiation of our products and how they play into the furnace. And I think there's a lot of cost down that comes out for our customers and the consequence of what we do for them. So I think that leaves us feeling pretty good about it.

Speaker 1

I think the new applications point is a really good one. I think one of the things we're being told is that already at the lower device prices, you're getting penetration of that sort of 800 volt architecture on to more vehicles because they're becoming more cost effective. And I think if you think about the sort of the overall market for power electronics today, silicon carbide will be seen as the sort of premium device with the premium performance and the premium price. Clearly, as the cost of the device comes down, the cost of an inverter, for example, drops, that is going to open up newer applications. You're going to see more of it, I think, in just regular sort of grid power conditioning for solar farms or even in due course maybe in domestic inverters where people have got sort of solar panels plus the battery together with obviously things like data centers where you've got higher power demand for some of the newer data centers that are being put out there to support AI.

Speaker 1

The power conditioning becomes more important, efficiency and sort of heat management sort of matters more and obviously as those prices come down that will help. So that's how we're thinking about it in the round. Does that help Maggie?

Speaker 6

Yes. Okay. Excellent. Thank you very much. Appreciate it.

Speaker 2

I think Maggie just morning by the way. One other point, don't forget that the returns on this investment are attractive because they're incremental investments on existing sites. So in other words, we have two sites with space, most of the infrastructure, and therefore, most of the expenditure goes into equipment. Hence, why as before, this is the investment has a transit percent.

Speaker 6

Got it. Okay. Excellent. Thank you very much.

Operator

We currently have no further questions. So I will hand over to Pete for final remarks.

Speaker 1

Very good, Luis. Thanks so much. Well, with that, just thanks so much indeed, everybody. Thanks for your time and have a good day.

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Earnings Conference Call
Morgan Advanced Materials H2 2024
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