Morgan Advanced Materials plc

Hello, everyone, and thank you for joining the Morgan Advanced Materials four-year results 2025 call. My name is Lucy, and I'll be coordinating your call today. If you would like to ask a question during today's presentation, you may do so by pressing star followed by one on your telephone keypad. If you change your mind, please press star followed by two to remove yourself from the queue. It is now my pleasure to hand over to Damian Caby, Chief Executive Officer, to begin. Please go ahead.

Thank you, Lucy. Good morning, everyone. I'm Damien Kaby, the Chief Executive of Morgan Advanced Materials, and today with me is Richard Armitage, our CFO. I'll kick off today with a summary of our full year results at group level. Richard will then take you through the financial positions and the technical guidance, and I will come back to share progress against the strategy that we unveiled in December last year, and our outlook for 2026 before I'll be moving on to Q&A. So in 2025, we delivered a resilient performance in the backdrop of challenging market conditions. We're executing our strategy, making headway in our leader, and we're well on track to deliver early wins in 2026. We're focused on maximizing our portfolio value with the sale of MMS and the initiation of a strategic review of our thermal products division. Our outlook for 2026 is in line with current market expectations. We're expecting organic constant currency revenue growth of 1% to 2% in end markets, which have broadly stabilized. The 3.3% OCC decline of our revenue last year was driven by the well-publicized downturn of the semiconductor market. In 2025, revenues in this market remain stable at low level. In the other segments, changes in our sales offset each other. We continue to deliver strong growth in aerospace and defense, driven by new engine and MRO orders. Healthcare revenue declined year on year due to tariff-related inventory adjustments and lower volumes in some of our customers' mature product lines. In the process and metal industries, we saw mid-single-digit declines in Europe and in Asia. Petrochemicals and chemicals held their ground with growth in North America of setting declines in Europe. As you can see on the chart to the right, through the past 18 months, Group OCC revenue has been stable. Despite the end market environment, we delivered a resilient headline margin of 9.6% in line with expectations. The continued positive contributions of pricing and efficiency improvements, the benefits of our simplification program and cost control, offset the majority of the impact of volume and mix. Our results announcements released earlier today provides our views on the outlook for 2026. I will come back to that at the end of the presentation. We'll now hand over to Richard.

Thank you Damian and good morning everyone. I would like to start with an overview of the financial results for the year to the 31st of December 2025. As expected, headline revenue was £1.3 billion, reflecting a 3.3% drop on an organic constant currency basis. Following a decline of 5.3% in the first half, revenue in the second half was broadly flat year-on-year, which points to a degree of stabilisation in a number of our end markets. Allowing for pricing of around 3.5% for the year, the volume decline in the year was around 6.7%. It is worth noting also that the 3.3% revenue decline equates to the decline in semiconductor revenue of around £33 million, demonstrating the resilience and stability of the rest of the business. Group headline adjusted operating profit, which includes £5.3 million of MMS operating profit predisposal, was £99.1 million, a reduction of £29.3 million, giving an adjusted operating margin of 9.6%. Return on investor capital was 14.1%, slightly below our three cycle range, but still delivering an attractive return. Headline free cash flow was an inflow of 45.4 million, which shows an improvement over last year as we continue to improve our working capital. Adjusted EPS was 15.9 pence per share, and we have held the total dividend for the year flat at 12.2 pence. Specific adjusting items amounted to £47.6 million for the year on a continuing basis. Turning to look at the reporting segments in more detail, we can see that the principal driver of performance carbon revenue was the year-on-year decline in semiconductor, albeit that semiconductor revenue stabilised during the year, with the second half broadly flat half-on-half. Aside from semiconductors, the business has shown good stability through the downturn, Aerospace and defence was slightly down year on year due to the timing of some large defence orders, whilst our rail and energy businesses continue to perform well. On a sequential basis, the decline through to the first half of 2025 and subsequent stabilisation is also visible. The impact on operating margin of lower volume and a weaker mix was partially mitigated by substantial efficiency and simplification benefits, which limited the margin decline to around 2.6%. Technical ceramics has shown very good resilience over the last two years and was able to achieve revenue growth during 2025. The main driver has been aerospace and defence with growth of 22% in that sector, driven by the demand for new aircraft, along with robust maintenance revenue driven by increased fleet utilisation. Technical ceramics industrial business also showed low single-digit growth, despite the industrial downturn, helped by its focus on a differentiated product range and customer service. Partly offsetting this were healthcare, which was affected by lower volumes for some mature product lines, and semiconductor, which followed the market downturn. Operating margin also remains stable at 11.5%, with a slightly weaker mix being offset by efficiency improvements. Thermal products performance was influenced by regional economic dynamics as you can see here. Europe showed the most marked decline due to low investment in process industries, whilst weak demand in metals and automotive impacted the business globally. However, we can see from the sequential graph that most of this decline was between the first and second halves of 2024, with revenue having been broadly stable since then. In the strategic growth area of fire protection, double-digit growth was achieved with strong demand from the Middle East. The principal driver of the 3.3 percentage point decline in margin was volume. given that thermal products is a high fixed cost business with a roughly 40% drop through on revenue movements. We also experienced operational issues in our US business which negatively impacted margin by one percentage point. Then FX and hyperinflation accounting in Argentina causing a further one percentage point decline. We would note that we would expect a strong drop through in thermal reversing this volume effect as markets recover. We're also pressing ahead with a substantial site improvement plan that will benefit the US business. Turning now to the profit bridge, we can firstly see a negative FX impact arising from the progressive weakening of the US dollar versus sterling, with total FX reducing margin by 40 basis points. The average US dollar rate was $1.32 in 2025 compared with $1.28 in the prior year. The principal impact on margin though was volume and mix, which led to a 4.4 percentage point reduction. This was caused by the volume decline and associated overhead under recovery, combined with a mixed effect of semiconductor sales being weaker than expected. We were able partly to offset this with 1.7 percentage points of margin derived from another year of consistent delivery from our simplification and continuous improvement programs. We expect this performance to continue in 2026 and also to benefit from our transform activities with net benefits of circa £11 million expected this year. Pricing of around 3.5% served to offset inflation of around 5% on cost of goods sold. Our simplification programme is nearing completion with £16 million of in-year benefits delivered in 2025 as planned. And it is worth remembering that the work we have done to reduce our manufacturing cost base over the last three years, coupled with our planned optimisation opportunities, has given us the opportunity to accelerate margin improvement via a healthy drop-through as end markets recover. We incurred significant specific adjusting items at £47.6 million. The largest item was a non-cash impairment of £15.6 million in relation to our semiconductor asset in the UK. This is part of the previously announced £60 million capacity investment and represents equipment that is devoted to specific product rates for which demand is currently uncertain. Costs associated with our business simplification programme amounted to £13.4 million, Implementation costs to date amount to £35 million, for which we have delivered benefits of £24 million. Once complete, we expect total cumulative savings of £27 million for implementation costs of £40 million, which is in line with our original projection when the programme started in 2023. Absent any material adverse developments in our external environment or portfolio changes, this will conclude our restructuring activities for the time being. Expenditure on our ERP rollout plan has progressed as planned, with £13.3 million incurred on design and configuration in the period. We expect to incur around £20 million in 2026, before the programme starts to wind down during 2027. We have also recorded a movement in the fair value of our shares in Fosico India Limited as at the 31st of December of £7.2 million, which values our holding at £47 million. However, the business has recently released a strong set of results for 2025 and if our holding were valued today, it would be approximately £54 million today. Moving on to cash flow, I would firstly note our working capital, which showed a much improved performance over prior year with an inflow of £50.4 million. This comprised an underlying improvement of circa £13 million, resulting from a strong focus on inventory and receivables management, supported by a further £38 million of non-recourse working capital arrangements. Net capital expenditure amounted to £65.9 million, lower than the prior year as our investment in semiconductor capacity came to an end. Cash flows relating to exceptional items totaled £22.8 million, comprising simplification costs of £10 million and investments in our ERP rollout of £13 million. Free cash flow was therefore an inflow of £45 million. We did receive a net £10 million after tax and fees from our sale of MMS, with the balance of consideration due to be received later in 2026. We completed the second tranche of our share buyback and, as previously announced, paused the programme in early January. Net debt finished at £232 million, excluding lease liabilities, in line with our expectations and representing 1.8 times EBITDA. As a reminder of our capital allocation policy, we are fully aware that the decline in our EBITDA has resulted in our leverage moving above our target range of one to one and a half times. We're focused on correcting that and will bring leverage to around one and a half times over the next two years. Our target leverage therefore remains in the one to one and a half times range in relation to ongoing operations. And as before, we would consider increasing this in due course into the one and a half to two times 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 £50 million or 1.2 times depreciation for the next three years. We will maintain the dividend for now, then grow it in line with adjusted earnings once cover returns to around 2.5 times. Once stabilised, we will consider the need to fund inorganic investment alongside additional returns to shareholders. The Board will review this situation regularly, recognising the opportunity that additional returns present to return cash to shareholders and enhance earnings. Finally, I will move on to technical guidance. As noted, we expect capital expenditure of around £50 million. Our net finance charge will be around £24 million, increasing in part due to the expiry of £94 million of fixed debt during the year, on which we have been paying an average interest rate of 3%. Our effective tax rate will increase slightly into the 27% to 29% range due to our mix of profitability shifting slightly towards higher taxation regimes. I would also note that so far the direct impact of tariffs has been immaterial, although we continue to note the potential for an indirect impact on end market demand. We would expect year-end leverage to be around 1.7 times. Thank you, and I would now like to hand back to Damien.