The benefits of the cost reductions made this year are expected to offset the impact of lower revenue levels in the second half.
The Morgan Crucible Co. recently issued its interim management statement regarding current trading, financial performance and outlook for the 2009 full year. Group performance for the second half of 2009 is anticipated to be in line with expectations. In general, end-market demand has stabilized, having softened further during the summer as anticipated. The benefits of the significant cost reductions that Morgan Crucible has made this year are expected to offset the impact of these lower revenue levels in the second half of the year.
“The group’s performance in the second half of the year has continued to demonstrate the significantly improved quality and resilience of Morgan Crucible’s portfolio in what remains a challenging market environment,” said Mark Robertshaw, CEO. “Our strategy of reducing the group’s exposure to economically cyclical markets has significantly mitigated the worst impacts of the global recession on our business and our margins.
“Looking forward, I am cautiously optimistic that end-market demand now appears to have stabilized in most areas, although we think it is premature to suggest that a meaningful recovery is yet underway. Overall conditions in emerging markets, notably China and India, continue to look healthier than those in the Western world economies, where demand generally remains subdued. Throughout the year, we have taken decisive actions to align our cost base to revenues, and we believe these actions position us as a leaner and fitter business for when markets ultimately recover.”
Traditional Carbon business revenues continued to be impacted during the summer months by the economic downturn in the electrical and seal and bearing businesses, as well as in some of the other niche markets, such as semiconductors. Recent sales levels and order activity in most of the business’ markets have now stabilized, and, in some, there has been moderate increased activity in recent weeks, though it remains unclear as to whether this represents genuine end-market recovery or a supply chain correction. The Carbon business continues to expand its activities in the renewable energy sectors, with new initiatives in solar, wind and energy storage holding promise for future growth.
U.S. body armor sales remain considerably below 2008 levels, though the group has secured additional orders outside of the U.S. for delivery over the coming months.
Aggressive cost reduction actions that began toward the end of 2008 have reduced the impact of the large decline in the business’ end markets. Permanent headcount in the Carbon business has been reduced by approximately 15%, and short-time working is in place at a number of sites. Capital expenditure remains very tightly controlled, and there is an ongoing focus on working capital reduction to ensure that cash generation is maximized.
NP Aerospace is trading in line with expectations, as the business has continued to deliver against major vehicle programs for the UK Ministry of Defence. The current NP Aerospace order book provides good visibility over the coming months, and there are a number of ongoing initiatives in the UK and overseas that present further opportunities to leverage the global reach and materials technology of the business.
During the year, the Technical Ceramics business has maintained its focus on positive mix shift, moving toward higher-margin, higher-value-added end-markets such as medical and aerospace. In parallel, the continuous operational improvement program, cost reduction initiatives, and an emphasis on positive price pass-through are all contributing to supporting operating margins in very difficult market conditions.
Although the overall market demand has declined in 2009, there are some areas that have shown recent signs of improvement. The U.S. market appears to have stabilized, although Morgan Crucible continues to watch carefully for any signs of a further downturn. Some weakness in the aerospace and industrial gas turbine sector is being offset by improvements in demand from semiconductor and telecoms markets. The group is also beginning to ramp-up the next generation of hard disc drive products.
The European business has had a difficult year of being consistently challenged by weak market conditions in general industrial markets and construction. This principally affects the thermal processing business in Germany. Since the half year, Morgan Crucible has also seen a reduction in industrial gas turbine demand. In both Europe and North America, a highlight of 2009 has been the continuing strength of medical customers. Developing exposure to this sector remains an important focus for the division.
Work on consolidating the division’s footprint has continued in the second half of the year. The group announced and has initiated the move of business from the Auburn site into the Hayward location in California, and the benefits of this move are expected during 2010.
As anticipated, overall end-market demand for Thermal Ceramics continued to weaken during the summer months but appears to be stabilizing. Order books in emerging markets, particularly China and India, have been showing a modest improvement and appear to be flattening out in North America and Europe.
The chemical and petroleum sector remains quite robust, with good demand in the Middle East and Latin America. Iron and steel demand is recovering somewhat from a very low base, as are sales to the automotive industry. The majority of other end markets, while generally not worsening any further, are as yet showing little sign of recovery. Cost reduction initiatives have continued into the second half, including the successful closure of two small fiber production sites in North America and Europe, which will help mitigate the lower revenues in the second half of the year.
Revenues in Molten Metal Systems (MMS) have improved in the second half of the year, driven by modest recovery in Asia and Europe. Margins are anticipated to improve over the first half, benefiting from the reduction in operating costs that was implemented in the first half, particularly in Germany. The expanded Indian operation, which continues to perform well, together with the new plant in China, means that MMS is well-positioned to benefit from the global recovery with a much-reduced fixed cost base.
The group continues to face a challenging economic environment, although, encouragingly, demand now generally appears to have stabilized. Morgan Crucible believes that its strategy of focusing on less economically cyclical markets has successfully mitigated the worst impacts of the downturn. In addition, the actions to align the cost base to revenues leaves the group well-placed to benefit as markets recover.
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