FULL-YEAR RESULTS FOR THE YEAR ENDED 31^st DECEMBER 2014

Results summary

*     Definitions of the financial measures can be found in the glossary

Financial highlights

·     Revenue at constant currency increased by 1.8% compared to 2013. Revenue was 3.8% higher in the second half than the first on an organic and constant currency basis

·     Order intake for the full year was encouraging. Book-to-bill ratio was 1.02 times with all geographies above 1.00 times and a year-end order book at constant currency circa 9% above that at the end of 2013

·     EBITA margin for the full-year increased 40 basis points to 12.8% (2013: 12.4%).  The EBITA margin in the second half of 2014 was 13.0%

·     Reported results were impacted by a strong sterling against most currencies during 2014. Relative to 2013, the impact of foreign exchange translation was an adverse movement of £52.3 million on revenue and £7.9 million on EBITA

·     Cash flow from operations remained strong at £120.0 million (2013: £127.0 million). Net debt at the year end was £207.0 million (2013: £186.5 million). Net debt to EBITDA ratio at the year end was 1.4 times (2013: 1.3 times)

·     The Group has booked a £51.9 million charge before tax in the income statement (2013: £12.9 million) in respect of a number of specific adjusting items, details of which are provided below. Due to the nature of these items they are excluded from the underlying profit figures.  The cash cost of these items in 2014 was £5.3 million with a further cash cost of £6.6 million expected in 2015

·     Proposed final dividend increased to 7.0 pence per share (2013: Final 6.7 pence per share), which would result in a full-year dividend of 10.9 pence (2013: 10.5 pence), a 3.8% increase

Regional Highlights

·   In North America the Thermal Ceramics, Electrical Carbon and Seals and Bearings businesses performed well, partially offset by a weaker performance in Technical Ceramics, particularly in the ceramic cores business. At constant currency, revenue increased by 3.6% compared to 2013 delivering mid-teen margins at reported rates of 14.9% (2013: 15.4%) 

·   European markets remained challenging during the year with like-for-like revenue, excluding Composites and Defence Systems (C&DS), flat compared to 2013. C&DS was impacted by lower MoD demand and its revenue was £25.3 million lower than 2013. However, reported European EBITA margins continued to improve to 12.2% (2013: 11.8%) for the full-year, reflecting the improvements made in the cost base from restructuring actions  

·   Asia/Rest of World delivered strong revenue growth and margin progression in 2014, with 13.0% revenue growth on a continuing and constant currency basis, with all major geographies showing growth in the year, and EBITA margin at reported rates improved by 180 basis points to 12.8% (2013: 11.0%)

            Operational highlights and other developments

·   R&D and capital investment: The Group continues to make good progress on its strategy of investing in technology differentiation and profitable growth. Research and development expenditure has increased to 2.3% of revenue (2013: 2.1%) and capital expenditure at £33.8 million is circa 1.2 times depreciation. The new Global Materials Centre of Excellence for Structural Ceramics will be operational in the first half of the year and new manufacturing facilities in Abu Dhabi, South Korea and China will all be operational in 2015. In December 2014 an agreement was signed with Yongda Group (China) to create a Morgan-majority 58:42 joint venture to manufacture ceramic cores for the investment casting of turbine blades for the Chinese market 

·   Acquisitions: The Group acquired the Porextherm business in Germany in July 2014 for Euro 26.0 million. This microporous insulating business is highly complementary to the Group's existing businesses in an area of differentiated technology serving highly demanding applications in aerospace, oil and gas and industrial markets 

·   Disposals: The Group has completed the portfolio reshaping it committed to in November 2013, exiting businesses with an annual revenue of £40-50 million that did not meet the Group's growth, margin or technical differentiation requirements.  A net £3.9 million charge for these sales and exits is shown in the income statement in the 'Specific adjusting items' column 

·   Restructuring of businesses: Further good progress has been made in improving the profitability of the Electrical Carbon and Seals and Bearings businesses, with margins up to 14.7% and 10.1% respectively for 2014.  Further improvement will come from a rationalisation of the Group's carbon materials footprint, which started in the second half of 2014 and is expected to yield additional annualised benefits of circa £3 million (circa £1 million of benefit in 2015).  This has resulted in a charge of £16.3 million in 2014, circa £2.0 million of this is a cash cost in 2014, with a further £5.1 million in 2015. The charge is shown in the income statement in the 'Specific adjusting items' column 

·   Composites and Defence Systems:  Revenue and EBITA margins for the full-year were £31.5 million and 3.8%, with the second half revenue increasing by 26.6% compared with the first half to £17.6 million and margins increasing to 10.8%. Following the reduction in UK MoD demand, the carrying value of the goodwill and intangibles of C&DS has been assessed and a £26.9 million non-cash charge for impairment has been made and reported in the 'Specific adjusting items' column.  The business remains an important supplier to the UK MoD but continues to develop international defence and commercial opportunities outside of the traditional UK MoD contracts. This business is expected to have annual revenues in the £30-40 million range for the next two years

·   Refinancing: The Group refinanced its previous £150 million RCF with a new five year, £200 million facility on 17^th October with significantly reduced interest costs. With this refinancing and the repayment of $100 million of US Private Placement debt in December 2014, the Group's net bank interest charge on a continuing organic basis at constant currency and at present interest rates is expected to be reduced by circa £3 million in 2015 compared to 2014

·   New Board appointment: The Group announced on 30^th January 2015 the appointment of Pete Raby as Chief Executive Officer, with effect from 1^st August 2015, following the departure of Mark Robertshaw at the end of 2014. Pete joins the Group from Cobham plc where he has been a member of Cobham plc's executive committee since 2010. The Board is grateful to Kevin Dangerfield for agreeing to act as Interim CEO until 1^st August 2015.

Commenting on the results and outlook for Morgan Advanced Materials, Interim Chief Executive Officer, Kevin Dangerfield said:

"In spite of mixed market conditions throughout 2014, Morgan has continued to drive performance through profitable revenue growth and operational improvement, and the Group's performance in the second half of 2014 has been encouraging.  Regionally, Asia has delivered the highest revenue growth and margin increase and globally, technology families such as Thermal Ceramics, Electrical Carbon and Seals and Bearings have all achieved margin increases. Significant progress has been made in our proactive portfolio reshaping, exiting lower margin business and acquiring Porextherm, and continuing to invest capital and resources in our technology base for future profitable growth.

Against the back drop of continuing mixed market conditions as we enter 2015, Morgan will continue to focus and invest in its key technology areas to drive differentiation, positive mix shift and sustainable growth potential. This investment in the business combined with a positive order book as we start 2015 gives the Board confidence that the Group can make further progress in 2015."

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Operating Review

Sales by market for Full-Year 2014

North America

Revenue for the North American region for the year was £353.1 million, representing a decrease of 1.9% compared with £359.9 million in 2013.  At constant currency the year-on-year increase was 3.6%. Revenue in the second half of 2014 was 2.9% higher than the first half at constant currency.

EBITA for the region was £52.5 million (2013: £55.5 million) with the margin maintained in the mid-teen range at 14.9% (2013: 15.4%). 

The Technical Ceramics business has had a weaker 2014 compared to 2013, impacted by a reduction in revenue at the Certech business that provides ceramic cores used in the manufacture of turbine blades for aerospace and industrial gas turbines. In addition the Certech business also had a range of operational and yield issues during 2014 with a reduction in profit compared to 2013 of £4.6 million at constant currency. These yield issues have improved through the latter part of the year but still require more work in 2015.

Thermal Ceramics, Electrical Carbon and Seals and Bearings all delivered good revenue and profit margin. The Thermal Ceramics business continued to perform well through the year in niche automotive applications, fire protection, general industrial markets and an increased level of activity from large project orders. This business has continued to expand the manufacturing capacity for Superwool® low bio-persistence fibre in 2014 as the region looks to continue the technology change to this highly differentiated range of materials. In the Electrical Carbon business, increased demand across a number of end-markets and continued market share gains were the key drivers for growth. Petrochemical and water applications continued to be the main driver for growth in Seals and Bearings.

The order intake in North America has remained positive through the year and this provides a good base for further progress as we enter 2015.

Europe

Revenue for the European region for the year was £325.7 million, representing a decrease of 8.8% compared to 2013.  At constant currency the year-on-year decrease was 5.5%. C&DS was the major contributor to this decline and like-for-like revenue, at constant currency and adjusting for the impact of acquisitions and exits, for the rest of European business was flat.

EBITA for the region decreased to £39.8 million (2013: £42.0 million), while the full-year margin continued to improve to 12.2% (2013: 11.8%), despite lower revenue.

The Electrical Carbon and Seals and Bearings businesses have shown growth year-on-year offset by a generally weaker period of trading for Technical Ceramics and a flat trading period for the Thermal Ceramics business. The Electrical Carbon and Seals and Bearings businesses both delivered improved EBITA margins in 2014 compared to 2013 and this margin improvement should continue into 2015. The significant rationalisation of the carbon materials footprint that was announced in the second half of 2014 is progressing well and will deliver the benefits forecast for these carbon businesses. The charge for this in 2014 is £16.3 million, circa £7.1 million of which is cash, £2.0 million in 2014 and £5.1 million in 2015, for an annualised benefit of circa £3 million (circa £1 million of benefit in 2015).

The C&DS business has continued its strategy and major change programme of focussing on defence and commercial business outside of the traditional UK MoD contracts. During 2014 the business continued to win some MoD contracts but was unsuccessful in others.  With the significant reduction in MoD business compared to recent years, the Group has impaired £26.9 million of goodwill and intangible assets which represent the majority of these intangibles created and relating to the UK MoD as part of the purchase of C&DS during the years 2007 to 2012. The business continues to create new business both in the UK and internationally. Over the next two years this business is expected to have annual revenue in the £30-40 million range.

In July 2014 the Group purchased the Porextherm business in Germany for an enterprise value of Euro 26.0 million. This microporous insulating business complements the Group's existing businesses and technology in an area of differentiated and highly demanding insulating products supplied in to oil and gas, aerospace and industrial end markets. The integration and development of the technology across the Group has been very successful with our existing North American and Asian businesses benefitting from the additional technology and products in their regional markets.

In terms of portfolio management, in addition to the acquisition and integration of Porextherm, the region has successfully exited the UK fired shapes business and the Thermal Ceramics business in Wissembourg, France.

The order intake in Europe has been mixed through the year but overall marginally positive entering 2015.

Asia & Rest of the World

Revenue for the Asia & Rest of the World region for the year was £242.9 million, representing an increase of 1.0% compared with the £240.6 million in 2013. However on a continuing and constant currency basis the region delivered strong revenue growth of compared with 13.0%, with all major geographies contributing to this. 

EBITA for the region was £31.2 million (2013: £26.4 million), a margin of 12.8% (2013: 11.0%) a significant improvement over 2013. 

Trading across the region has been strong in 2014 with all our major geographies showing improvement, including China, India, Korea and the Middle East. The major end-markets in this region have all grown; energy, transportation, including marine and aerospace, and general industrial and petrochemical markets. Good progress has been made in the growth of western sourced, Technical Ceramics products for markets such as medical and aerospace and this growth is set to increase further in 2015. An example of this increasing presence of our Technical Ceramics businesses in Asia is the agreement signed in December 2014 with Yongda Group, China to create a Morgan-majority 58:42 joint venture to manufacture ceramic cores used in the investment casting of turbine blades primarily for the Chinese market. New manufacturing facilities are being built in Abu Dhabi, South Korea and China, all for growth opportunities across the full range of our product and technology offering.

In terms of portfolio management, the region has successfully exited the Chinese lithium ion business.

The order intake for the region has been positive through the year providing confidence in the outlook as we enter 2015.

Financial Review

Reference is made to 'Underlying operating profit' and 'Underlying EPS' below, both of which are defined in the glossary. These measures of earnings are shown because in the judgement of the Directors they allow the reader to obtain a proper understanding of the financial information and the best indication of underlying performance of the Group.

Business Performance Review

In the consolidated income statement the Group separately presents "Specific adjusting items" totalling £51.9 million and the associated tax credit of £5.5 million separately. In this Business Performance Review results are shown before these items.

Group revenue in 2014 was £921.7 million, a decrease of 3.8% on a reported basis compared with 2013.

Group EBITA before restructuring charges was £118.0 million (2013: £119.0 million) representing a margin of 12.8% (2013: 12.4%).

Group underlying operating profit (EBITA after restructuring costs) was £112.4 million (2013: £108.5 million).  Underlying operating profit margin was 12.2%, compared to 11.3% for 2013.

The £5.6 million (2013: £10.5 million) of net restructuring costs and other one-off items relate to a number of rationalisation actions mainly in Asia and Europe.  This includes the transfer of business to the Group's new greenfield high-temperature ceramics manufacturing site in Dalian, China and further costs incurred in Asia as a consequence of moving to the One Morgan model.

The Group amortisation charge for the year was £8.2 million (2013: £8.3 million).

The net finance charge was £20.8 million (2013: £23.3 million), comprising the net bank interest and similar charges of £15.8 million (2013: £17.0 million), gain from financial instruments of £0.7 million (2013: nil) and the finance charge under IAS 19 (revised), being the interest charge on pension scheme net liabilities which was £5.7 million (2013: £6.3 million).

The tax charge for the period, excluding specific adjusting items, was £24.7 million (2013: £21.1 million). The effective tax rate, excluding specific adjusting items, was 29.6% (2013: 27.4%).

Underlying EPS was 22.1 pence (2013: 21.5 pence).

The Return on Operating Capital Employed at 31 December 2014, defined as Group underlying profit for the last 12 months divided by the sum of working capital and the net book value of tangible assets, was 27.7%, compared with 27.5% at 31 December 2013.

Specific adjusting items

In the consolidated income statement the Group presents specific adjusting items totalling £51.9 million and the associated tax credit of £5.5 million separately. In the judgement of the Directors due to the nature and value of these items they should be disclosed separately from the underlying results of the Group to allow the reader to obtain a proper understanding of the financial information and the best indication of underlying performance of the Group.

Restructuring costs

As part of the strategic objective to drive the performance of the Electrical Carbon and Seals and Bearings businesses to mid-teen margins and beyond the Group is undertaking a significant rationalisation of the carbon material footprint. Specifically, the cessation of carbon material manufacturing and a number of other finishing operations at the Swansea, UK site.  These operations are being consolidated in to other Group locations, mainly USA and Hungary. This has resulted in a charge of £16.3 million in 2014, which is predominantly in respect of property related provisions, redundancy costs and asset write-offs.  There has been a cash outflow of £2.0 million in 2014 and a further £5.1 million is expected to be settled in cash in 2015.  An income tax credit of £1.2 million has been recognised in respect of these items.

Business exit costs

In January 2015 the Group completed the sale of a Thermal Ceramics business in Wissembourg, France. This business manufactures low-temperature fibre boards used mainly in the building industry.  The Group has incurred a £1.9 million loss on disposal of this business and has booked an impairment charge in 2014 to reflect this. An income tax credit of £0.2 million has been recognised in respect of this item.

Transaction-related costs

Transaction-related costs consist of £0.6 million of advisor costs incurred in relation to dealing with the proposal made by Vesuvius plc to acquire the Group, £0.4 million of legal and due diligence fees on the purchase of Porextherm Dämmstoffe GmbH and £0.2 million of legal fees relating to the establishment of a new joint venture in China.  An income tax credit of £0.1 million has been recognised in respect of these items.

Settlement of prior period anti-trust litigation

During the year the Group has fully and finally settled a number of the European Anti-Trust actions relating to pre-2000 cartel activity and has a provision adequate to cover the remaining claim and the related legal fees.  The net charge to the income statement in the year in relation to this is £3.6 million.

Impairment of intangible assets

As a result of the continued reduction in demand on C&DS from UK MoD, the review of the carrying value of the intangible assets and goodwill of C&DS has resulted in an impairment charge of £26.9 million. Following this impairment charge, the carrying value of the C&DS intangibles and goodwill is £17.2 million.  This is supported by the current expectations of the future trading performance of the C&DS business.  An income tax credit of £2.1 million has been recognised in respect of the impairment charge.

Loss on disposal of business

The net loss on disposal of £2.0 million is a result of the disposal of two businesses in the period:

a)   UK Fired Shapes Business

On 3 April 2014 the Group sold its UK Fired Shapes business to Jemmtec Limited (trading as Magma Ceramics) in exchange for a 35% shareholding in Jemmtec Limited, a fired ceramics shapes business.  The profit recognised on disposal of the business was £1.3 million. Assets disposed of consisted of £0.9 million of property, plant & equipment, £0.8 million of inventory and £0.2 million of goodwill. Based on the management structure of Jemmtec Limited the Group has determined that it does not have control of Jemmtec Limited and is therefore accounting for its 35% shareholding in Jemmtec as an associate.

b)   Morgan AM&T Hairong Co. Ltd

On 20 June 2014 the Group disposed of the whole of the share capital of Morgan AM&T Hairong Co. Ltd ('Hairong') for £0.3 million consideration. The loss recognised on disposal of this shareholding was £3.3 million. Prior to the acquisition the immediate parent company of Hairong was Morgan AM&T (Shanghai) Co., Ltd, in which the Group holds a 70% shareholding. The adjustment to the non-controlling interest component of equity due to this transaction was £1.2 million. An income tax credit of £1.9 million has been recognised in respect of this item.

IAS 19 Employee Benefits

The IAS 19 charges are summarised in the table below. 

The Group pension deficit has increased by £67.2 million since last year end to £211.8 million on an IAS 19 (revised) basis.  The UK defined benefit pension schemes deficit increased by £43.8 million to £118.8 million (2013: £75.0 million) and the US deficit increased by £19.5 million to £58.8 million (2013: £39.3 million). These increases were primarily due to lower discount rates, with the UK moving from 4.5% pa at 31 December 2013 to 3.6% pa and the US moving from 5.0% pa at 31 December 2013 to 4.1% pa.

Cash Flow

Cash flow from operations was £120.0 million (2013: £127.0 million). Free cash flow before acquisitions and dividends was £40.1 million (2013: £37.4 million). Dividend payments increased to £30.2 million (2013: £24.7 million). The exchange movement largely results from the fact that that Group has mainly US dollar debt. The Sterling/US$ exchange rate at 31 December 2014 was 1.56 compared to 1.66 at 31 December 2013.

Net debt at the year end was £207.0 million (2013: £186.5 million), representing a net debt to EBITDA ratio of 1.4 times (2013 year end: 1.3 times).

The Group refinanced its previous £150 million RCF with a new five year, £200 million facility on 17th October 2014 with significantly reduced interest costs. With this refinancing and the repayment of $100 million of US Private Placement debt in December 2014, the Group's net bank interest charge on a continuing organic basis at constant currency and at present interest rates is expected to be reduced by circa £3 million in 2015 compared to 2014. At 31 December 2014 the Group had drawn down on £53.4 million of this £200 million facility.

Foreign exchange - translation effect - illustration

For illustrative purposes, the table below provides details of the impact on 2014 revenue and EBITA if the actual reported results, calculated using 2014 average exchange rates, were restated at 2014 closing exchange rates.

* Other FX rate change is the weighted average of a number of other currencies, of which the largest movements are in Russian Rouble, Japanese Yen and Brazilian Real.

Final Dividend

The Board is recommending a final dividend, subject to shareholder approval, of 7.0 pence per Ordinary share (2013: 6.7 pence). This is an increase of 4.5% compared to the final dividend declared in 2013. The dividend will be paid on 29 May 2015 to Ordinary shareholders on the register of members at the close of business on 8 May 2015.

Glossary of terms