MCRUF (MCRUF) Q2 2026 Earnings Report, Transcript and Summary

Welcome, everyone, and thank you for joining the Morgan Advanced Materials Half Year Results 2026 Call. My name is Gabriel, and I will be coordinating your call today. [Operator Instructions] I will now hand over to your host, Damien Caby, Chief Executive of Morgan Advanced Materials. Please go ahead.

Good morning, everyone. I'm Damien Caby, Chief Executive of Morgan Advanced Materials. And I'm joined on the call today by Richard Armitage, our CFO. I will start today with a summary of our half year results. Richard will then take you through the financial position, the outlook as well as the technical guidance. And I will then come back to share progress against the strategy that we have unveiled in December last year, and then we'll move on to Q&A. I am pleased to report that performance for the first 6 months of the year is in line with expectations. Revenue shows positive momentum and operating profit margin is improving sequentially. We're making clear progress against our strategy to unlock our potential by transforming our operational effectiveness and driving stronger and more profitable growth. Within our transform effectiveness strategic lever, we're progressing well on 2 large site turnarounds and on the delivery of benefits from our group procurement approach. In drive growth, we have established focused teams to accelerate in selected key markets, and we have already started to deliver wins from our enhanced OEM engagement strategy. In maximize portfolio, as previously announced, the group is undertaking a strategic review of its Thermal Products division with a full range of options under consideration, including a potential disposal. We have made good progress in assessing the division's growth prospects, and we're preparing for a number of options. Further updates will be provided in due course as appropriate. We are on track to achieve our financial framework and deliver our 12% margin target in 2028. During the first half of 2026, excluding the positive impact of the phasing of a takeaway payment, which -- take-or-pay payment, which Richard will explain shortly, the group revenue grew by 3% organically at constant currency. This was primarily driven by 2 areas. Firstly, in our Energy business, our strategy to combine collaboration with OEMs at the design stage to benefit from the strong investment cycle and generate aftermarket pool with alignment with operators and their priorities to secure strong aftermarket sales has helped us to take advantage of increased investment in power supply and storage. Secondly, our Aerospace and Defense business has continued to grow, driven by aviation with both new engine and MRO orders. This was partly offset by lower demand for body armour in Defense and elsewhere, our sales were resilient. The first half demonstrates -- illustrates our strategic momentum to drive stronger growth and transform our operational effectiveness. I am pleased by our visible progress towards unlocking our potential. And I will now hand over to Richard.

Thank you, Damien, and good morning, everyone. I'm going to start with an overview of the financial results for the 6 months to the 30th of June 2026. Revenue was GBP 518 million, an increase of 4.8% on an organic constant currency basis, resulting from growth in our Aerospace and Energy end markets. Our revenue includes a GBP 8.9 million phasing benefit from a take-or-pay arrangement with one of our semiconductor customers, which will not repeat in H2. If we exclude this phasing benefit, revenue grew by 3% on a constant currency basis. Group headline adjusted operating profit was GBP 57.8 million, giving an adjusted operating margin of 11.2%. Operating margin also reflects the GBP 8.9 million phasing benefit without which it would have been 9.6% Return on invested capital was 14.5%, slightly below our through-cycle [indiscernible] trajectory. Free cash flow saw an inflow of GBP 3.5 million, broadly in line with the first half of 2025 and reflecting the investments we continue to make into the group. Adjusted EPS was 10.7p per share, and we have held the interim dividend flat at 5.4p. Specific adjusting items amounted to GBP 18.4 million for the half year, driven primarily by expenditure on the implementation of our group-wide ERP system. Turning to look at the reporting segments in more detail. We can see the Performance Carbon revenue increased by 4% on a constant currency basis, which includes the GBP 8.9 million take-or-pay revenue. This take-or-pay contract related to the reduction in our outlook for semiconductor revenue that we announced during the second half of 2025 arising from the sourcing of certain products moving to China. Whilst we had expected to supply these products during the second half of 2026, the customer has settled their contractual equipments in full during the first half. Excluding this phasing item, revenue declined by 1.8% versus the prior year with strong growth in energy, notably in wind, more than offset by reduced demand for body armour and industrial equipment. As has been seen before, the demand for body armour is driven by uneven government procurement patterns, and we do expect to see an increase in demand going into 2027 with new products being launched. We would also note some caution around the outlook within our European industrial segments, where we are starting to see slightly softer demand. Margin improved by 70 basis points, driven by the GBP 8.9 million take-or-pay income, which will not repeat in H2. Excluding this item, margin showed a deterioration caused primarily by the lower Armour sales. Technical Ceramics saw strong growth during the first half, growing 7.8% on a constant currency basis. The main growth driver continues to be aerospace and defense with growth driven by demand for ceramic cores, a critical component in the manufacture of jet engine turbine blades. Aerospace and Defense now accounts for 39% of divisional revenues following strong growth over the last few years. We also saw strong growth in energy, driven by increasing demand for industrial gas turbines to power data centers. Operating margin improved by 130 basis points to 13%, mainly due to a strong drop-through on revenue growth. We have spoken before of the opportunity for revenue growth to help drive margin expansion in this way, which was clearly demonstrated by Technical Ceramics in the first half. Thermal Products returned to growth during the first half of 2026, showing 2.5% growth on a constant currency basis. We saw a strong performance in Asia, driven by growth in metals processing in India and China. In North America, increased CPI project revenue and demand for our innovative energy storage solutions also supported growth. However, European revenue is being impacted by weaker investment in Process Industries attributed to the geopolitical environment. Coming into the year, we did experience a number of operational challenges arising mainly from equipment failures in our main North American facility affecting margin. These have been addressed, and we are starting to see a steady improvement in performance. Turning now to our profit margin bridge. We have attempted to illustrate the movement firstly from the first half of last year to the second and then from the second half of last year to the first half of this year. The comparison from H1 to H2 of last year was firstly driven by a number of one-off items in the first half that did not repeat in the second. However, the principal driver was volume and mix where we saw a sharp decline in demand from industrial markets as well as declines in revenue from Armour, semiconductor and health care that affected our margin mix. We have then started to see a solid improvement in margin this year, driven by a 250 basis point contribution from efficiency and simplification, which substantially reversed the decline in the second half of last year. We did experience some operational issues earlier in the year, primarily affecting Thermal Ceramics as noted. I would also note that we have successfully offset inflation through pricing of around 2% as is our usual practice. Finally, the payment under a take-or-pay agreement added 160 basis points to margin. Excluding this, operating margin in our first half would have been 9.6%, a significant improvement over the second half of last year and a result that gives us confidence in being able to make further progress towards our target of 12% margin by 2028. Moving to specific adjusting items. In the first half, we incurred costs of GBP 18.4 million. Restructuring costs of GBP 9.4 million include the costs associated with the closure of a Technical Ceramics site in the U.S. This investment will allow us to optimize margin over the longer term, and Damien will talk more about our site turnaround plans, which are progressing well. Once completed, this closure will bring our simplification program to an end, delivering a total annual run rate of GBP 27 million of ongoing cost benefits for an implementation cost of GBP 45 million. The work we have done to reduce our manufacturing cost base over the last 3 years, coupled with our planned optimization opportunities will accelerate margin improvement via a healthy drop-through as end markets recover. This will support the achievement during 2028 of our 12% margin target. Expenditure on our ERP rollout plan has progressed as planned with GBP 11.5 million incurred on configuration and implementation in the period. We expect to incur between GBP 22 million and GBP 24 million of total spend during 2026 before the program starts to wind down towards the end of 2027. We have also recorded a gain in the fair value of our shares in Foseco India Limited as at 30th of June of GBP 2.5 million, which values our holding at GBP 49 million. Moving on to cash flow. I would firstly note that working capital showed an outflow of GBP 23.5 million during the period, reflecting normal first half seasonality. We expect this to substantially reverse during the second half. Net capital expenditure amounted to GBP 12.5 million, significantly lower than the prior year as our investment in semiconductor capacity came to an end and due to the phasing of spend on certain other projects. Exceptional items totaled GBP 15.2 million, and free cash flow was therefore an inflow of GBP 3.5 million. Cash flow includes a further GBP 4.4 million benefit from supplier financing and nonrecourse debt factoring programs, which totaled GBP 42.6 million at the 30th of June. Net debt finished at GBP 253 million, excluding lease liabilities, in line with our expectations and representing 2x EBITDA. We anticipate that leverage will improve during the second half as free cash flow continues to normalize and as we realize the proceeds from the disposal of our shares in Foseco India. As a result of this, we expect year-end leverage to be around 1.7x. As a reminder of our capital allocation policy, our target leverage remains in the 1 to 1.5x range in relation to ongoing operations, which we will make progress towards reaching over the next 12 months. As before, once our leverage is within this range, we would consider a temporary increase into the 1.5 to 2x range in the event of a compelling acquisition. Whilst capital investment remains a priority to support organic growth opportunities, we foresee limited needs for capacity investment and expect to be able to maintain overall CapEx at around GBP 50 million or 1.2x depreciation for the next 3 years. We will maintain the dividend for now and grow it in line with adjusted earnings once capital returns to around 2.5x. Once stabilized, we will consider the need to fund inorganic investments alongside additional returns to shareholders. The Board will review the situation regularly, recognizing the opportunity that additional returns present to return cash to shareholders and enhance earnings. Now I will move on to technical guidance. Simplification costs for 2026 are expected to amount to around GBP 10 million, bringing the program to a close. ERP expenditure is expected to be in the range of GBP 22 million to GBP 24 million. We continue to expect capital expenditure of around GBP 50 million during 2026 weighted to the second half due to phasing. Our net finance charge will be around GBP 24 million, increasing on the prior year in part due to the expiry of GBP 94 million of fixed debt during the year on which we have been paying an average interest rate of 3%. Our effective tax rate is expected to be in the 27% to 29% range due to our geographic mix of profitability. We expect year-end leverage to be around 1.7x, showing a positive trajectory towards our target range of 1 to 1.5x. It is worth highlighting that with our simplification and ERP programs coming to an end in 2027 and with capital expenditure expected to remain close to 1x depreciation in the medium term, we expect to be generating positive free cash flow by the end of 2027. Finally, I will move on to the outlook for 2026. We are mindful of the current geopolitical and macroeconomic environment, particularly within European industrial markets. We, therefore, expect organic constant currency revenue growth of around 2% for the full year. Noting also a headwind due to foreign exchange, we expect an adjusted operating profit margin for the second half broadly in line with that of the first, excluding the GBP 8.9 million phasing benefit from the take-or-pay agreement. Thank you. And I would now like to hand back to Damien.

Thank you, Richard. Let me now shift the focus towards our strategic progress. We have been executing at pace on our strategy to unlock our potential, achieve 12% margin by 2028 and then reach 14% margin via stronger margin enhancing growth. Our strategy is founded on 3 levers: transforming operational effectiveness, driving stronger growth and maximizing portfolio value. In transforming operational effectiveness, we're carrying on and moving beyond continuous improvement. We are addressing large underperforming sites. We are leveraging the group's scale for procurement and back-office efficiency, and we are enhancing business analytics for faster and better informed decisions. In driving stronger growth, we are adding incremental capacity to fulfill multiyear contracts, and we are proactively pursuing customer collaborations in selected markets, focusing where we have the strongest right to win. Stronger partnerships with key customers help us embed more into the installed base to benefit from aftermarket recurring revenue. And in maximizing our portfolio value, we continue to shape our portfolio and establish partnerships to achieve or expand advantaged positions in our selected areas. This chart summarizes the significant progress that we've made over the first half of 2026 on our -- and our next steps. As you can see, there is a lot going on, and we're managing our initiatives and priorities via a new operating cadence. The adoption and engagement have been strong, and I'm very pleased to report that we're on track on all key actions and confident in our ability to continue to progress on all fronts and achieve our goals. Starting with transform operational effectiveness, during 2025, we launched our first large site turnaround. And in 2026, we initiated a second large site. I will provide more information on these 2 sites later in my presentation. Both transformations will be completed by the end of 2027 and further sites are under review. The implementation of our new group procurement function remains firmly on track. We have established spend visibility and initiated the shift from reactive purchasing to proactive category management. This will unlock better costs, higher supply resilience and lower working capital. We are already executing on savings initiatives, and we will see the first tangible benefits in the second half of 2026. Our goal is to embed category management across the business by the end of the year and quickly expand the scope of the savings. We remain confident that the site turnaround and procurement initiatives will deliver at least GBP 20 million of margin improvement by 2028, supporting our 12% margin. Moving on to drive growth. The team at Thermal Products in the U.S. and Performance Carbon have increased delivery reliability, which has contributed to higher revenue. Across our businesses, focused teams have been set up or reinforced in selected markets to drive stronger growth. Our business leaders set a rigorous commercial operating cadence to drive cross-functional project management and pace on commercial opportunities. They have been increasing their engagement with key customers to enhance the way we collaborate with OEMs, and I will come back to this in a few minutes. We have been rapidly deploying incremental capital to expand our capacity for parts used in ion implantation in silicon semiconductor fabrication, and we are seeing a 15% growth in sales. As previously reported, we're also enhancing the capabilities of our Armour business to support future growth for vehicles. This is backed by government contracts and will support our growth during 2027. To maximize our portfolio value, we're pursuing partnerships along our strategic value chains. And as previously announced, we are undertaking a strategic review of Thermal Products. We've made good progress in assessing the division's growth prospects and are preparing for a number of options. I would now like to spend a few minutes to share more detail on some of our high-impact initiatives, starting with site turnarounds. The opportunity to transform operational effectiveness at a few of our larger sites is significant, and it will allow us to unlock growth and improve margins. We have identified sites representing 20% of group revenue as targets for this initiative. During 2025, we started our first large turnaround at our site in Augusta, Georgia. This site is one of the largest facilities in the group, manufacturing multiple Thermal product lines for our North America customer base. Has been increasing -- facing increasing supply chain and product line complexity and reliability challenges. This has resulted over time in productivity and delivery issues, which has in turn impacted profit and revenue. So during 2025, we launched a multiyear program to work -- to create a more predictable, scalable and competitive manufacturing operation. This is a comprehensive program, which includes changes to production and inventory planning, optimization of the product portfolio, operational effectiveness and reliability improvements. This turnaround is progressing well. The new finished inventory concept is 70% implemented and has been underpinning a more than 50% reduction in lead times and 12% growth in sales. Across several production lines where the deployment of improved operating principles and management systems is in progress, we have seen meaningful sustained improvements in productivity, yield and equipment effectiveness. This turnaround is not complete yet, and there is much more to go for. These are tangible signs of progress. We're expanding and accelerating the deployment to achieve material and sustainable margin improvements from 2027 onwards. This year, we have initiated action on our ceramic site at Hayward, California. We announced its closure in March and the relocation of its production to alternative sites in the U.S. and Europe to optimize asset utilization. The qualification of the new manufacturing locations and the phased transfer of assets is well underway. We expect to see the benefits of this relocation start to drop through from 2028. We're also seeing benefits from our driving stronger growth strategic lever. We're taking focused actions to accelerate growth in selected key markets. Let me illustrate how this works in Energy, which is an attractive segment underpinned by the electricity requirements of AI and data centers, the intermittency of lower carbon power generation and challenges of grid resilience. The reinforcement of our collaboration with leading OEMs in this field has contributed to make it one of our fastest-growing end markets. In battery energy storage systems, our growth is driven by differentiated materials for higher performance rather than by like-for-like products. In this application, our microporous products are increasingly replacing aerogels and thermal runaway protection due to their attractive cost and performance proposition in lithium ion phosphate chemistry. In fuel cells, we're providing complete multiproduct thermal insulation solutions, and we're gaining share with a global leader. Our engagement with wind turbine OEMs has also contributed to drive growth in Energy. The qualifications that we have achieved by our best-in-class materials and designs generate aftermarket pull-through revenue. In rail, we've been regularly achieving above-market growth and to drive further growth in the aftermarket, we are reinforcing our collaboration with leading OEMs to be better built into the installed base. We're also experiencing -- are reinforcing our presence in Asia, where we've recently secured new electricity connector business. These are just 4 examples of OEM partnerships in attractive and growing market where we are building on our strength and establishing a spec'd-in sustainable position and driving our share gain. So to conclude our presentation today, we have achieved positive momentum in revenue and profit during the first half. I'm pleased with the progress of our strategy. All 3 levers are on track. The strategy will continue to drive benefits during H2 and increasing benefits during 2027 and 2028. We're on track to achieve our financial framework and deliver on our 12% margin target in 2028. As previously noted, regarding the strategic review of Thermal Products, we're making good progress in assessing the division's growth prospects and are preparing for a number of options. Our commercial and strategic agendas are ambitious. The Morgan team has embraced them with strong engagement and energy while keeping focus on the safety of our operations and on the quality of our products and of our supply to our customers. Many people across the organization are resolutely stepping up out of their comfort zone to participate in the implementation of our new ERP, to redesign processes, to transform the way we operate in some of our sites, to contribute to cross-functional market or customer-focused teams. And my greatest satisfaction is to see our strategy and this commitment unlock our potential. Thank you. That ends our formal presentation. We will now take questions, and I will hand back to the operator to coordinate that.

[Operator Instructions] Our first question today is from Scott Cagehin from Investec.

First question, could you just explain a little bit more about take-and-pay -- sorry, take-or-pay and why the timing is what it was and how that come about? And secondly, could you just give us a little bit more color on European industrial and where you're seeing things specifically? And thirdly, on Energy, is it sort of very specific to one particular area? A bit of color on all those would be very helpful.

Scott, thank you for the questions. Yes, the take-or-pay contract was one of several that we have in place. The revenue had been anticipated to be fulfilled mainly in the second half of this year. The customer no longer requires that particular set of products. They have honored the take-or-pay agreement and they paid it to us and satisfied that obligation during the first half. It's pretty much as straightforward as that.

Thanks, Scott. Regarding European industrial situation. So as Richard noted, we saw a decline in Thermal Products in Europe in the first half. As you know, the Thermal business is partially exposed to the CapEx cycle, and we've seen some attentism and cautiousness in the market to make big turnarounds or expand capacities in Europe. Looking into the second half of the year, we're seeing -- we're expecting a similar trend. We're also seeing, when we look at our order book, a bit of the same attentism or cautiousness in other parts of our business beyond the Thermal Products, particularly in Performance Carbon. And that's where we can see -- we expect to see a bigger impact of the geopolitical situation at this time. Energy is a good question. It's coming actually from several end markets and several applications. Richard mentioned that there is a significant demand increase in industrial gas turbines tied to the increase in demand and tied to AI data centers and things of this nature. But we've also seen some nice growth in wind. We're seeing, as I mentioned, significant growth in battery storage, which is -- which are areas where we're not only growing with the market, but we're actually establishing a nice position with our technologies and essentially establishing or growing a share in a market that's growing. So you have the double multiplier effect.

Our next question is from Jonathan Hurn from Barclays.

I have 3 questions as well, please. First one was just on Aerospace and Technical Ceramics. Obviously, you saw really good growth in that in the first half. Can you talk a little bit about capacity there? Are you seeing any sort of capacity constraints for your ceramics because obviously, you're also selling those into industrial gas turbines. So that was the first question. The second one was just about MMS and the disposal. I think in terms of the shares that you received, the lockup finished at the end of June. In terms of interest in disposing that stake, has there been quite good interest? What's going to be the process? How fast do we think that can come through? And the third one, I think you're fully a bit limited about what you can say here. But just in terms of Thermal, obviously, you said there's a number of options and flagged sale as one of them. But in terms of the options outside of that, can you maybe just give us a little bit more color, if you can, in terms of the structure of those additional options for Thermal? Those are the 3.

Jonathan, starting with Aerospace, yes, there is good growth. We're quite used to introducing additional capacity in fairly modest tranches to support growth in that business that we will continue to do. And it happens that one of the projects that leads us to have a higher rate of CapEx in the second half of the year versus the first is exactly one of those. So we're anticipating further growth. We are putting in capacity as required, and we'll carry on doing so. Disposal of Foseco India, we've done some very good preparations. So lockout period concluded on the 25th of June. They actually have quarterly reporting. So they entered the close period 1st of July through to about a week from now. So that limits what you can do in that period. We've had very good interest indeed from a number of institutions. And once the close period is finished, we will be launching a process with those institutions, anticipating selling our holding during the second half of the year. Finally, on Thermal, yes, you're right. The process is ongoing. We made good process at evaluating our options. We have noted that one of those is to sell the business, but clearly, we've made no decision yet. The alternative really is given the very interesting growth opportunities we've identified in the business, given the opportunity for margin expansion that Damien has outlined in some detail. It is understanding in full what that will look like over time and thinking about what is the best way for the business to realize its potential. I think that's the best way of describing the alternative, if that makes sense.

Our next question is from Harry Philips from Peel Hunt.

Three questions also, if I could. First, just a little bit of clarity around the reference to equipment performance in Thermal and you sort of referred to that in your speech. The second is just trying to get an idea of the '27 profit bridge because we've got -- obviously, you've got some perform gains to come through, but there's still quite a lot of costs around and sort of a lot of moving parts. So just obviously can see the goal of 12% and that sound. But it's just next year just seems to be quite a lot of, I would say, elements moving around and just maybe some clarity around those or at least certainly something realistic to work off. And then lastly, just on Semicon more broadly, obviously, with one customer doing the take-or-pay, where is the sort of Semicon business? Is it commissionable? Is it sort of at a sort of conclusion as it currently stands? Just sort of where are we on that particular part of the business, please?

I'll start with the 2027 viewpoint, Harry and then hand over to Damien. So I think I'd refer you back to our CME presentation last December, and we were working off a base of about 9% margin. We showed our intention to return to 12% by 2028. And there are 3 components to that. So one is we assumed relatively modest revenue growth. If you remember, we were not banking on a particularly strong margin market recovery. And that sort of assumed growth of around 2% a year. We had the site turnaround plans, which is why that's so important. And then we had sort of other operational improvements, things like procurement, starting to take advantage of our investment in digital tools basically to get better at running the business. And each of those contributed to that 9% to 12% bridge in roughly equal proportions. So thinking about 2027, I think we're reasonably comfortable with where consensus is currently sitting, and you can envisage that we get there through those 3 courses of action.

On equipment performance in Augusta, I mean, it's multiple lines on this asset. A few of them had some recurring availability issues. As Richard noted, this has been addressed. This was probably happening in Q1. The team did a great job at addressing these issues. We had some impact on delivery and some impact on cost. This is something that sometimes happen. And given the size, it did have an impact that Richard expressed. Semicon business, where is this? I think it's important to note that our Semicon business is a combination of -- or multiple -- plays in multiple parts of the value chain. And there's been a lot of focus on the investment that we made 2 years ago or 3 years ago regarding the supply of materials for semiconductor -- silicon carbide semiconductor. What we're seeing today is a significant rebound of demand in the other part of our silicon -- the silicon business, which is tied to the area of memory chips, strong demand, especially in the places that are tied to the manufacturing of these assets and less to the equipment growth and new builds at the fabs. And that's across our Technical Ceramics and Performance Carbon divisions. As far as the material growth part of the business is concerned, as noted previously, this supply chain is largely moving to China. There is, however, still demand in the West, in Europe and in the U.S., which we're intending and actually are supplying. So that means that the utilization of the capacity that we've invested in is lower than anticipated, but is there, and we're commissioning these assets progressively as demand comes back.

[Operator Instructions] We currently have no further questions. So I will hand back to Damien Caby for closing remarks.

Thank you, and thank you, everyone, for attending our presentation today. Just in closing, say that I'm very pleased with the progress during the first 6 months of the year. It's great to see that the group has shown positive momentum in revenue and in profit during this period. Also good to see that we're making strong progress in executing our strategy to unlock the group's full potential through enhanced operational effectiveness and stronger, higher quality growth. And I'm pleased as well that we're on track, as Richard mentioned just before, to achieve our financial framework and to deliver on our 12% margin target by 2028. Thank you very much.

Thank you. This concludes today's Morgan Advanced Materials Half Year Results 2026 Call. Thank you for joining. You may now disconnect your lines.