HALF YEAR RESULTS FOR THE PERIOD ENDED 30 JUNE 2014

Results summary

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

Financial Highlights

·   As anticipated in the Group's May IMS, revenue at constant currency in the first half of the year was broadly flat compared to the equivalent period last year

·   Order intake in the first half was encouraging with a book-to-bill ratio of 1.06 times with all geographies above 1.00 times and the Asia region showing particular strength

·   Group EBITA margin for the first half of the year was 12.6% (H1 2013: 12.0%)

·   Reported results were impacted by the continued strengthening of sterling.  Relative to H1 2013, the impact of foreign exchange was an adverse movement of £33.7 million for revenue and of £5.1 million for EBITA

·   Net debt at the half year was £194.3 million (Full year 2013: £186.5 million). Net debt to EBITDA ratio at the half year was 1.3 times (Full year 2013: 1.3 times)

·   Interim dividend increased by 2.6% to 3.9 pence per share (2013: Interim 3.8 pence per share)

Regional Highlights

·   In North America the strength of the Thermal Ceramics, Electrical Carbon and Seals and Bearings businesses was offset by a softer performance in Technical Ceramics, particularly from the ceramic cores business, driven by lower demand in aerospace, as customers destocked, and by low operational yields. At constant currency, revenue increased in the first half of the year by 1.4% compared to H1 2013 delivering mid-teen margins of 15.3% (H1 2013: 14.6%)

·   European trading was broadly stable compared with H1 2013 with the exception of the Composites and Defence Systems (C&DS) business, where revenue was £13.8 million lower than H1 last year, in part through the exit of low margin lines of business but also due to the timing of programme orders and shipments. European margins were the same as last year at 11.2%. Adjusting for the weaker C&DS business in the first half, and at constant currency, revenue was down 1.8% compared to H1 2013 with margins increasing by 110 basis points to 12.7% (H1 2013: 11.6%)

·   Asia/Rest of World businesses delivered strong revenue and margin progress in the first half of the year, with 9.4% revenue growth on a constant currency basis against the equivalent period last year and, at constant currency, a 240 basis point improvement in EBITA margin from 10.3% to 12.7%

Operational Highlights

·    The Group has made continued progress in portfolio reshaping with the sale of the loss- making Hairong lithium ion material business in China and the completion of the exit of the UK fired refractory shapes business, merging it with Magma, a UK-based fired shapes specialist, in return for a 35% stake in the larger entity. These together gave a £2.0 million net one-off charge, shown in the income statement as 'Specific adjusting items' in a separate column

·    The Group has now exited/sold c.50% of those low margin businesses that were highlighted in our portfolio strategy earlier this year. There is an active programme of targeting the remaining c.£25m of low margin business for improvement or exit

·    There was encouraging progress in the Group's continuing businesses despite the softness in the C&DS in the first half. Aside from C&DS, Group revenue grew by 3.1% at constant currency, EBITA margin increased to 13.3% (H1 2013 12.2%) and the Group's outstanding order book was 12.4% higher than at the same time last year

·    Good progress continued to be made in improving the profitability of the Electrical Carbon and Seals and Bearing businesses through the first half of 2014.  Electrical Carbon profit margins are now entering the mid-teen range while Seals and Bearings delivered strong revenue growth of 10.7% on a constant currency basis compared to the first half of 2013 with improving margins

·    The Group has successfully completed its acquisition of Porextherm for an enterprise value of c.Euro 26.5 million. This microporous insulating business complements the Group's existing businesses and technology in an area of differentiated and highly demanding applications in aerospace, oil and gas and industrial markets

·    A new Global Materials Centre of Excellence for Structural Ceramics was announced in the first half of 2014 to be located in Stourport, UK. This aims to build on the tried and tested model of developing world-leading advanced materials technology that the Group has already successfully delivered from its high-temperature insulating fibre Global Centre of Excellence in Bromborough, UK

·    Construction and fit out of the Group's new greenfield high-temperature ceramics manufacturing site in Dalian, China has now been completed with operational commissioning currently under way. Work has also now started on the new Superwool® fibre greenfield site in Kizad, UAE with targeted completion and operation in the second half of next year

Commenting on the results, strategy and outlook for Morgan Advanced Materials, Chief Executive Officer, Mark Robertshaw said:

"The improvement in the Group's order intake and order book over the past several months is encouraging as we enter the second half of the year, although we expect market conditions to remain mixed. I am pleased with the progress we are making in proactive portfolio reshaping both in terms of exiting lower margin lines of business but also with the growth coming through in geographies such as Asia and in technology families such as Thermal Ceramics, Electrical Carbon and Seals and Bearings.

The key element of our strategy continues to be creating sustainable differentiation through leading-edge materials technology and sophisticated application engineering. To this end we are investing organically in research and development, such as the new Centre of Excellence for Structural Ceramics in the UK, and in higher levels of growth capital expenditure, including the new greenfield sites in Dalian, China and Kizad, UAE. The acquisition of Porextherm complements our existing microporous insulating business, creating a world-leading provider in the market for this differentiated technology.

Our focus remains on self-help initiatives: driving positive mix, delivering cost efficiencies and making continued investments in technology and differentiation. This, aligned to an improved order book compared with the equivalent period last year, gives the Board confidence that the Group will make progress in the second half of 2014."

For further enquiries:

There will be an analyst and investor presentation at 08.30 (UK time) today at Goldman Sachs, The Auditorium, 120 Fleet Street, London, EC4A 2BB. A live video webcast and slide presentation of this event will be available on www.morganadvancedmaterials.com. We recommend you register at 0815 (UK time).

North America

Revenue for the first half of the year was £171.7 million (H1 2013: £183.9 million) representing a decline of 6.6% at reported rates. At constant currency there was an increase of 1.4%.

EBITA for the first half of the year was £26.2 million (H1 2013: £27.3 million), with EBITA margin improving to 15.3% in the first half of 2014 compared with 14.8% in H1 2013.

Thermal Ceramics, Electrical Carbon and Seals and Bearings all delivered good revenue and profit margin progression in H1 2014. Improving large project orders and strong demand for insulating fibre in demanding automotive applications have been the major drivers in the Thermal business. In the Electrical Carbon business, increased demand for high-temperature insulation was a key driver as was continued market share gain across a range of applications. Growth was strong for Seals and Bearings in petrochemical and water applications.

The Technical Ceramics businesses were impacted by continued lower demand for our hard disk drive products, but also a drop in revenue in our 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 experienced a range of operational and yield issues in the first half of 2014 with a reduction in profit compared to the first half of 2013 of £3.0 million at constant currency. The second half is expected to show an increase in Certech margin as yield levels begin to improve.

The order book in North America has remained positive through the first half and this provides a good base for improving performance through the second half of 2014.

Europe

Revenue for the first half of the year was £159.4 million (H1 2013: £180.4 million) representing a decline of 11.6% at reported rates. At constant currency this decline was 9.4%. C&DS was the major contributor to the decline with revenue of £13.9 million (H1 2013: £27.7 million).

EBITA for the first half of the year was £17.8 million (H1 2013: £20.2 million).  EBITA margins were the same as H1 2013 at 11.2%, despite the lower sales and the profit impact of this.  

The Electrical Carbon and Seals and Bearing businesses have both shown growth year-on-year.  In Electrical this was mainly in rotary systems, and in Seals and Bearings in petrochemical and water. This growth, combined with cost base reductions, has driven an improvement in margins for Electrical Carbon and Seals and Bearings which is forecast to continue in H2 and beyond as further operational and footprint rationalisation actions are taken. Revenue and order book in the Technical Ceramics and Thermal Ceramics business have remained relatively stable with markets showing few signs of any consistent pick-up in demand. The C&DS business had a soft first half of 2014, as contract wins in the period are for delivery through the second half of 2014 and beyond, which means that performance is forecast to improve as the second half progresses.

Since last year end Morgan completed the merger of its UK-based fired shapes business with Magma Ceramics, a UK-based fired shapes specialist business, in return for a 35% minority stake in the enlarged Magma business.

The Group successfully completed its acquisition of Porextherm for an enterprise value of c.Euro 26.5 million. This microporous insulating business complements the Group's existing businesses and technology in an area of differentiated and highly demanding insulating applications in oil and gas, aerospace and industrial end markets.

The outlook for the second half is for higher revenue in C&DS with demand in other businesses expected to be broadly similar to the first half of 2014.

Asia & Rest of the World

Revenue for the first half of the year was £117.3 million (H1 2013: £121.8 million) representing a decline of 3.7% at reported rates. At constant currency this was an increase of 9.4%.

EBITA for the first half of the year was £14.9 million (H1 2013: £13.1 million). EBITA margins improved significantly to 12.7% in the first half of this year from 10.8% in the first half of 2013.

Trading across the region has strengthened in the first half of 2014, with most major geographies showing improvements, including China, India, Korea and the Middle East. The main growth markets have been the energy sector, petrochemical and marine applications. Petrochemical projects have been particularly strong in India and the Middle East, having had a weaker 2013. Working effectively with Morgan businesses in USA and Europe, the Asian business has seen good growth in Western-sourced, higher technology products for markets such as medical and aerospace.  The Molten Metal Systems business, with close to 50% of its revenue from the region, continued to see soft demand across its main markets, particularly India.

EBITA margin in the first half of the year has also benefitted from a range of operational improvements including the closure of higher cost fibre lines in Australia, Japan and South Africa coupled with further investment in Superwool® enabled fibre lines in lower cost countries such as China.  As part of the Group's portfolio changes the region has successfully completed the disposal of a small loss-making carbon business in India (now a minority stake) and the sale of the Hairong lithium ion material business in China.

The order book for the region is strong, providing confidence in the second half outlook.

Financial Review

Reference is made to 'Underlying operating profit' and 'Underlying EPS' below, both of which are defined in the glossary at the end of this statement.  These measures of earnings are shown because the Directors consider that they give the best indication of underlying performance.

Business Performance Review

In the consolidated income statement the Group separately presents "Specific adjusting items" totalling £2.0 million in H1 2014. There were no specific adjusting items in H1 2013. In the Business Performance Review below results are shown before these items.

Group revenue in the first half of 2014 was £448.4 million, a decrease of 7.8% compared to the first half of 2013 and on a constant currency basis, revenue decreased by 0.9%.

Group EBITA before restructuring charges and other one-off items was £56.4 million (H1 2013:  £58.3 million) representing a margin of 12.6% (H1 2013: 12.0%).

Group underlying operating profit (EBITA after restructuring costs and other one-off items) for the first half of 2014 was £54.3 million (H1 2013: £51.6 million).  Underlying operating profit margin was 12.1%, compared to 10.6% for the first half of 2013.

The restructuring costs and other one-off items of £2.1 million (H1 2013: £6.7 million) relate mainly to the actions that the Group has undertaken as a consequence of moving to the 'One Morgan' model and the re-organisation into geographical regions, a charge of £1.7 million, and £0.4 million of third party advisor costs incurred as part of the acquisition of Porextherm. 

The Group amortisation charge for the half year was £4.3 million (H1 2013: £4.0 million).

The net finance charge was £10.5 million(H1 2013: £11.9 million), comprising the net bank interest and similar charges of £7.5 million (H1 2013: £8.6 million), and the finance charge under IAS 19 (revised), being the interest charge on pension scheme net liabilities, of £3.0 million (H1 2013: £3.3 million).

The tax charge for the period was £11.5 million (H1 2013: £10.2 million). The effective tax rate, excluding specific adjusting items, for the half year is 29.1% (H1 2013: 28.5%).

Underlying EPS is 10.6 pence (H1 2013: 10.0 pence).

The Return on Operating Capital Employed at 30 June 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 28.1%, compared with 21.2% at 30 June 2013.

Specific adjusting items

In the condensed consolidated income statement the Group presents specific adjusting items separately. In the judgment 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. No specific adjusting items were incurred in the six months ended 30 June 2013.

The specific adjusting item of £2.0 million in H1 2014 results from the net loss on 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.

Employee Benefits

The Group pension deficit has increased by £9.8 million since last year end to £154.4 million on an IAS 19 basis.  The main movement was in the UK defined benefit pension schemes. The UK deficit increased by £6.2 million to £81.2 million (December 2013: £75.0 million). This increase is mainly due to a lower discount rate - from 4.5% at 31 December 2013 to 4.3% at 30 June 2014. The US deficit increased by £0.5 million to £39.8 million (December 2013: £39.3 million).

Cash Flow

The net cash inflow from operating activities was £42.5 million (H1 2013: £55.7 million). Free cash flow before acquisitions and dividends was £6.8 million (H1 2013: £13.2 million).

The exchange movement largely results from fact that the Group has US dollar and Euro debt and £ sterling has strengthened against both of these in the period.

Net debt at the half year end was £194.3 million (2013 year end: £186.5 million) representing a net debt to EBITDA ratio of 1.3 times (2013 year end: 1.3 times).

Interim Dividend

The Board has declared an interim dividend of 3.9 pence per ordinary share. This is an increase of 2.6% compared to the interim dividend declared in 2013. The dividend will be paid on 28 November 2014 to Ordinary shareholders on the register of members at the close of business on 7 November 2014.

Principal Risks and Uncertainties

The Group has in place processes for identifying, evaluating and managing the key risks which could have an impact upon the Group's performance.

The current risks, together with a description of how they relate to the Group's strategy and the approach to managing them, are set out in the 2013 Annual Report, which is available at the Group's website at www.morganadvancedmaterials.com  The Group has reviewed these risks and concluded that they adequately represent the current principal risks and uncertainties of the Group and will continue to remain relevant for the second half of the financial year.

The principal risks comprise: technology obsolescence; recruiting, maintaining and motivating high-quality staff; treasury risks; quality of contracts; IT risks and cyber risks; product quality, safety and liability; single point exposures; environment, health and safety risks; changes to or non-compliance with laws and regulation; a changing political, economic and social environment; and pension funding.

Going Concern

As reported on page 45 of the 2013 financial statements, the Group meets its day-to-day working capital requirements through local banking arrangements and the committed £150 million unsecured five-year multi-currency revolving credit facility.  The headroom on this at the half year was £145 million.

The Group's forecasts and projections, taking account of reasonably possible changes in trading performance, show that the Group is able to operate within the level of its committed facilities. The Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the condensed consolidated financial statements for the six months ended 30^th June 2014.

Responsibility Statement

We confirm that to the best of our knowledge:

·     the condensed consolidated set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU;

·     the interim management report includes a fair review of the information required by:

(a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

(b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

By order of the Board

Andrew Shilston

Chairman

Mark Robertshaw

Chief Executive Officer

                                                    Glossary of terms