28 Jun 2006
The Morgan Crucible Company plc (“Morgan”), the specialist materials company, is issuing this trading update ahead of its half year results to be announced on 3rd August 2006.
- The transformation of Morgan has continued in the first half of 2006 with operating profit before restructuring costs at the half year anticipated to be somewhat ahead of expectations
- The first six months of 2006 like-for-like sales growth from continuing businesses is forecast to be c. 7% on a constant currency basis, and higher than this based on actual exchange rates, with the Technical Ceramics business experiencing particularly strong top-line growth
- Group operating profit margins have continued to show strong improvement and are expected to be approaching 10.5% for the half year
- The balance sheet remains robust and the Group pension deficit has been substantially reduced following a £40m top-up injection into the UK schemes in March
- Morgan's financial strength is being used to finance profitable growth with five small bolt-on acquisitions or JVs made in the first half of 2006
- Mark Robertshaw will take over as Chief Executive from 4 August and the Board is also pleased to announce that Kevin Dangerfield, currently Group Financial Controller, will become CFO on the same date.
Commenting on the results, Chief Executive, Warren Knowlton said:
“We have delivered on the promises that I made just over three years ago: to deliver double digit margins, to simplify the Morgan group, and to ensure that Morgan is in a strong financial position from which to grow. Our forthcoming results will reflect that Morgan has successfully been transformed from the company it was when I took over in early 2003 and is now very well placed to pursue its new goal of targeting mid-teen operating profit margins.”
Divisional Trading Comment
The Carbon division has performed well in the first half of the year compared to the equivalent period in 2005 with progress in both top line growth and increased operating margins. Performance has been robust across almost all regions and markets. The Americas remain strong and there have been encouraging signs of improvement in some European markets. The Asian business, particularly in China, has benefited from our ongoing investment and taken advantage of strong demand in the region to deliver good growth. Sales in the traditional brush, seals and bearings markets are up on last year and the order books look solid. Sales in the armour market are increasing and more capacity is being installed to take advantage of the opportunities in both North America and Europe. The profits of the division are further benefiting from the various restructuring plans that have been implemented in recent years, leading to the closure of a number of sites, overhead reduction and an increasing presence in low cost manufacturing locations.
Building on the results of 2005, the Technical Ceramics division has started 2006 with a strong trading performance. The division has continued to focus on niche new business opportunities within its selected markets, and this continues to drive above-GDP sales growth. Operating margins showed a healthy increase as costs were controlled whilst the top line was grown. New product introductions have helped to offset the effect of raw materials and energy cost increases and have more than replaced declining or commoditised products at the end of their life. US markets remain strong overall with supplies to the telecoms market continuing the improvement we saw at the end of last year. We are also seeing good levels of demand for our products from the Aerospace market. Overall our markets in Europe were stable to positive. In Asia demand from local customers and the transfer of mature products from Western sites is leading to the full utilisation of expanded facilities.
The Thermal Ceramics division has experienced strong sales growth in many of its markets in the first half of 2006, with the order backlog increasing over the period. Sales performance in the Asia, Latin and North American markets has offset disappointing demand in Europe. However, the expectation is that Europe will improve through the remainder of the year, as export orders for aluminium and petrochemical markets come through.
Input costs, in particular energy and transport, have risen dramatically over the last year. To counter this, we have introduced further cost reduction programmes and price increases were implemented in January 2006 which will be followed by further rises in July 2006.
The bolt-on acquisition of Vesuvius was successfully completed in April with integration proceeding according to plan. In addition three new joint ventures have been signed of which two are in China and one in Russia. This will enable Thermal to increase its manufacturing presence close to the customer in high growth markets. Following the Vesuvius acquisition we have commenced additional restructuring within the division to streamline our infrastructure and ensure that our main European and American facilities become the lowest cost producers in their respective markets.
The overall cost reduction programme to counter higher input costs and fully leverage the Vesuvius acquisition has resulted in further restructuring costs of c. £8 million for an expected annualised benefit of £8 million.
Overall trading conditions improved for the Crucibles division in the first half of the year, with all regions exhibiting some gains over the previous period. Demand in the Americas was particularly strong, with escalating fuel and energy prices stimulating further interest in energy efficient metal melting systems. Consolidation of our Indian operations was achieved by the purchase of the remaining equity owned by our joint venture partner and by the subsequent acquisition of the Diamond Crucible Company in Gujarat. These investments now leave us well placed to exploit continuing growth in the Indian market and to provide additional manufacturing capacity to service a wider export base. Elsewhere in Asia, additional sales and marketing resources were deployed in anticipation of further market growth in the region.
The balance sheet of Morgan has been transformed over the past twelve months with net debt being eliminated. The deficit in our UK pension schemes has been substantially reduced by a £40 million cash injection in March and by changes to employee benefits where we agreed a move from a final salary to a career average scheme in the UK. The resulting balance sheet strength is being put to good use as we actively pursue bolt-on acquisitions as well as making further organic investment in growing our core businesses. In total we have made five bolt-on acquisitions or JVs so far this year focused on the Insulating Ceramics division. Following the Vesuvius transaction, we have commenced additional restructuring within the Thermal Ceramics business. As a Group we are expecting to charge c. £20 million of restructuring costs to the income statement in 2006 which includes the extra Thermal spend of c. £8 million.
In summary, strong progress continues to be shown in the Group's performance. In early 2004 we set ourselves a goal of hitting double digit operating profit margins on a run-rate basis by the end of 2006 and have hit these targets well ahead of schedule.
We look forward to further progress in the second half of the year.