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Morgan Crucible Reports Increased Revenue in First Half (posted 8/10/09)

August 10, 2009
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Morgan Crucible recently released its financial results for the half-year ended July 5, 2009. Revenue for the half-year increased to £492.0 million (approximately $822.7 million), up 22.6% from the first half of 2008. Underlying operating profit (EBITA after restructuring costs and one-off items) was £38.2 million (~ $63.9 million), down from the 2008 level of £46.4 million (~ $77.6 million), at a margin of 7.8% (11.6% in 2008).

NP Aerospace, in which Morgan Crucible increased its ownership from 49% to 60% in January, continues to perform very well, with revenues in the first half of the year of £95.5 million (~ $159.7 million), up from £36.8 million (~ $61.5 million) in 2008, and with a strong order book providing good visibility through to the end of this year and into 2010.

The Group has acted on cost reduction initiatives across its businesses over the past several months, with the majority of the benefits expected to come through in the second half of the year. Restructuring costs in the first half of the year were £8.2 million (~ $13.7 million).

“The Group’s results for the first half of 2009 demonstrate the improved resilience of the business in what is a particularly difficult market environment,” said Mark Robertshaw, CEO. “Our strategy of reducing exposure to economically cyclical markets has mitigated the worst effects of a very significant downturn in global industrial demand. The most notable example of this positive mix shift toward a more resilient portfolio is the excellent performance of our NP Aerospace business, which is on track to deliver a record year of sales and profits.

“Operationally, we remain focused on self-help initiatives rather than relying on a market recovery. To this end, we have undertaken significant cost reductions over the past several months and expect to see progressively increasing benefits coming through to the bottom line in the second half of this year to mitigate any further end market softening. In parallel, we are also maintaining a very rigorous focus on cash generation and balance sheet management and have improved our net debt-to-EBITDA ratio as a result of strong operational cash inflows.

“The global economic environment has been particularly challenging in the first half of 2009, and it is our expectation that industrial markets will remain weak for the second half of the year. Whilst we believe it is still premature to call an end to the downturn, there are some signs of a stabilization in order books and sales levels in recent weeks in certain sectors. Having acted decisively in our cost reduction initiatives, we believe that we are well-placed to capitalize on any recovery as and when it occurs. Overall, we believe that Morgan Crucible is a higher quality, more resilient business than in the past.”

At £200.6 million (~ $335.4 million), revenues for the total Carbon division were up by 69.9% on a reported basis compared to the same period last year. This increase reflects the inclusion of NP Aerospace in the division’s consolidated results for the first time following the increase in Morgan Crucible’s shareholding in NP Aerospace. The like-for-like revenue increase (i.e., including NP Aerospace revenues in the first half of 2008 when they were accounted for as an associate) on a constant currency basis was 12.9%.

This was driven by a particularly strong performance from the NP Aerospace business. Revenues for the underlying Carbon business, excluding NP Aerospace, were down 25.4% on a like-for-like constant currency basis, reflecting the impact of the economic downturn on the Group’s traditional electrical and mechanical businesses, combined with reduced levels of North America body armor revenues at $9.4 million in the first half of 2009 (compared with $27.5 million in the equivalent period last year).

In the Technical Ceramics division, total revenues for the first half of 2009 were £110.6 million (~ $184.9 million), an increase of 12.5%. This included £26.0 million (~ $43.5 million), up from the 2008 level of £14.4 million (~ $24.1 million), of revenue contributed by the businesses acquired from Carpenter in 2008. At constant currency, revenue in Technical Ceramics (excluding the Carpenter businesses) declined by 15.7%.

Demand in the Technical Ceramics businesses has inevitably been impacted by the overall economic environment, although there are some end-markets that have continued to show resilience. In the U.S. during the first half, demand held up well for industrial gas turbine applications in the Certech business and for advanced medical components. Aerospace markets started the year well but weakened during the second quarter, as customers have been de-stocking. Consumer electronic customers also saw a period of de-stocking in the supply chain that now appears to be stabilizing.

The division’s European and Asian regions had a challenging first half, with weak market conditions in general industrial markets and in construction, which affected the thermal processing business, particularly in Germany. Niche business in defense and medical markets was more robust. The more commodity product-focused site in Shanghai was successfully closed on time and to plan during the first half of the year.

In response to the weaker global market conditions, the division took action to protect its margins, including headcount reductions of close to 600 employees relative to June of last year. It is expected that these cost measures will deliver progressively greater benefits in the second half of the year without detriment to the division’s ability to respond to better market conditions as and when the macroeconomic climate improves. As a result, it is expected that the division will continue its performance in line with first half trading.

Two reportable segments are included in the Insulating Ceramics Division: Thermal Ceramics and Molten Metal Systems. Revenues within the Insulating Ceramics division in the first half were down by 2.2% at £180.8 million (~ $302.3 million) from 2008’s level of £184.8 million (~ $309.0 million). On a constant currency basis, revenues were down by 16.9%.

In the first half of 2009, Thermal Ceramics’ business revenues were at a similar level to last year (taking into account favorable currency translation). However, on a constant currency basis, the global slowdown led to a 16.0% year-on-year reduction in revenue.

Regionally, Thermal Ceramics has shown resilience in Asia and Latin America, with the expectation that the industrial markets of China, India and Brazil will be the first economies to show recovery in the last quarter of 2009 and into 2010. In contrast, the North American and European markets have been weak, with recovery in these two regions not expected until 2010.

Many of Thermal Ceramics’ markets continue to remain challenging, such as construction, automotive, and iron and steel. There are, however, positive signs in specific regions. China accounts for more than 50% of the world’s iron and steel capacity, and government infrastructure incentives are inducing improved utilization. In addition, demand in the petrochemical sector has also remained robust through the first half of 2009.

The business has implemented a global cost reduction program, with divisional headcount having been reduced by approximately 350 since June of last year. The closure of two fiber plants-Erwin, Tenn., and Skawina, Poland-will take effect in the second half of this year.

Looking forward, considerable efforts remain focused on the development of new products and the continued commercialization of recently launched products such as Superwool HT™ and Superwool Plus™. At the same time, engineering and research resources are also being utilized to optimize manufacturing processes to improve gross margins through improved raw material and energy yield enhancements. Overall, the later cycle characteristics of the Thermal Ceramics business mean that the division expects end market demand to be more challenging in the second half of the year.

Additional details are available at www.morgancrucible.com.

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