Morgan Advanced Materials Stock

Good afternoon, and welcome to the Morgan Advanced Materials plc Investor Presentation.

[Operator Instructions]

Before we begin, I would like to submit the following poll. And I would now like to hand you over to CEO, Damien Caby. Good afternoon.

Good afternoon, everybody. I'm Damien Caby, I'm the CEO of Morgan Advanced Materials and I'm joined today on this call by Richard Armitage, who is our CFO. I'm very pleased today to introduce you to Morgan Advanced Materials and then let Richard walk you through the -- our interim results, which we presented a couple of weeks ago.

By way of introduction about Morgan. Morgan is a global leader in advanced materials. We have a turnover of approximately GBP 1 billion. It's a large network of 56, 57 sites, approximately 8,000 employees. And what are our core capabilities as a business, which are the core capabilities that we are very well known and sought after are material science around 2 materials of ceramics and graphite and carbon, a deep application expertise in the use of these materials and then co-design manufacturing excellence.

And in general, and in specifics, our customers trust us to supply mission-critical solutions. The backbone of our business is our 3 divisions. They are the backbone of our operating model as well. They are aligned with specific versatile materials. As I said, ceramics on the one hand and graphite and carbon on the other one. These materials are very versatile because the way we operate, the way we use them is that we formulate them, we process them, and we tune not only their shape, but also their physical and chemical characteristics, the porosity, the electrical conductivity, their hardness, their resistance to mechanical stress and many other physical properties. These products are typically higher performing than metals or polymers. And that leads us to supply around 3,000 combination of materials and applications.

As you can imagine, the diversity of these applications and these materials makes that it's very important to be agile and to have a strong customer intimacy in this business. And that's why our 3 divisions are so core to our operating model because they help us -- they enable us to have a short operational decision-making process and to be close to our market and our customers.

You can see on the next slide, our key markets. And you can see that another strength of Morgan is the diversification that we have across different end markets. You can see that the top 2 -- the 2 largest markets for us are industrial processes. By this, we mean chemical processes, manufacturing processes for ceramics, for glass and aerospace and defense, which has progressively grown into being close to our largest market. What this means is that overall, 40% of our business is exposed to what we call the manufacturing investment cycles. When you are into process industries, you sell into parts and equipment insulation typically that are used in these processes. And they are not -- the use or the demand for these products is not proportional to the production of these industries, but more to their investment cycle and tied to replacement and to new builds.

In the case of aerospace and defense, similarly, we have an important part of our business that is dependent on the use of the aircraft as opposed to new builds of aircraft. Another characteristic of our business that's also implicitly visible in this chart is that we don't have -- we're not dependent on one single large customer. In fact, our largest customer represents less than 3% of group revenue.

So with these generally attractive end markets, this very strong capacity differentiating capabilities, we believe that this business has a very strong potential. And our strategy is called unlocking our potential. It is founded on 3 levers, which are displayed here, transforming our operational effectiveness where we are continuing to proceed with continuous improvement, which has been a significant factor of this business. We've demonstrated over and over the years, a capability to deliver continuous improvements to our processes, but we've decided now to move beyond that by addressing large underperforming sites and by leveraging the group's scale for procurement.

As you can imagine, a bit of a drawback from a business like ours where you really highly -- the operating model relies on operating divisions is that the group scale is not always levered to its best capability, and we are progressing with leveraging the scale of the business for procurement as well as back-office efficiencies and enhancing our business analytics through the implementation of an ERP and multiple data analytics systems.

The second big lever that we have strategic lever is to drive stronger growth. We are making sure that we are focusing on specific segments where we have a strong right to win by developing partnerships along the value chain with original equipment manufacturers, but also with users, with operators who use our products. And we are also focusing on expanding the share of the value that we go after, the share of the value chain. We've also, as part of this strategic lever, determined that there is areas where we can invest in capacity to fulfill multiyear contracts and to, in a bite-sized way, increase our revenue.

The last lever or the third lever is maximizing our portfolio value, which consists of 2 things is expanding our approach and our openness to partnerships. So looking for partnerships across the value chains where we play and reviewing our business portfolio, one of the important pieces of it being the announcement of a strategic review of our Thermal Products division, which we announced at the beginning of the year. That brings us to a clear road map, which consists in the midterm of benefiting from the initiatives which I've described before, which are entirely in our gift to execute. I'm talking about leveraging the group scale, I'm talking about digitalization, efficiency gains, turning around some underperforming sites, a bit of contribution from market growth, but not much.

We didn't want our road map to be dependent on revenue growth or on market growth. These 3 actions combined will give us the opportunity to target a 12% margin by 2028, which we have confirmed recently, we're making good progress on. And beyond that, we are targeting to reach 14% as we build our leadership positions and expand into adjacencies, deepen our positions in value chains and portfolio management.

I will now turn to Richard to introduce the -- sorry, we're progressing, as you can see here on this slide, very well at pace on all these different levers. We're progressing on 2 large site turnarounds. The first was launched last year. The second one consists of a shutdown of the site which we announced in March this year. We're also very confident that we will be able to fully deploy our group procurement approach and embed category management by the end of the year.

We've also established focused teams in drive growth to accelerate in certain key markets. And as far as the maximization of the portfolio is concerned, we have undertaking the strategic review, which is progressing at pace. This is now I felt that before I hand over to Richard to present some -- the results of the first half, it would be good to illustrate this drive growth by recent examples of achievements in that area. And these are both things that are the result of some of the focus that we've put as well as the result of some successful initiatives that were launched before we implemented the strategy, but that give us strong confidence that the approach works.

In the area of energy storage, we've gained significant share recently at one of the leading manufacturer of static battery storage by providing an alternative to an existing insulation product with a product that has a much better cost performance ratio. So not in kind, but with product that's mobilized our engineering capabilities in insulation and gives us access to a growing market with a differentiated product and essentially gaining share in a market that's growing.

In the case of wind, similarly, by combining our partnerships with manufacturing of gas -- manufacturers of wind turbines and strong commercial action with the operators of these wind turbines, we've been able to be spec-ed in, in some of the original designs, but also be an important player in the replacement part. And over the past 6 months, we've gained share at 3 of the large operators through a product that has a differentiated capability to be more energy efficient to have a better electrical performance, but also a longer, more resilient, more longer reliability in the system.

And as you can imagine, the cost to maintain these equipment when you have to climb up the pole, sometimes go on a boat to go and climb up the pole are quite significant as compared to the cost of the part that you have to replace.

And finally, in the case of rail, we're also gaining share by -- with a partnership with one of the leading construction of locomotives as well as by an increased commercial action, especially in Asia where we've gained share with a few of these operators. So you see how this action along the value chain is and combining the pull and the push or the push and the pull is particularly successful and creates opportunities for us to drive growth as opposed to grow with our markets, which, in many cases, are attractive to begin with, but we want to grow faster than our end markets.

I'll now hand over to Richard to go over the financial performance for the first half.

Thank you, Damien. Good afternoon, everybody. I'm Richard Armitage, I'm the CFO of Morgan. I'm just going to give you a brief update on our financial results for the first half. So starting with the overall performance, our revenue was GBP 518 million, which was an increase of 4.8% on a constant currency basis, driven by growth from our aerospace and energy end markets. There is in our first half results a phasing benefit of GBP 8.9 million. I can describe later what that is, if necessary, resulting from a take-or-pay arrangement with one of our semiconductor customers, that will not repeat in the second half.

Therefore, 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, which gives an adjusted operating profit margin of 11.2%. This was also affected by the take-or-pay item of GBP 8.9 million. Without that, operating margin would have been 9.6%. Return on invested capital was 14.5%, which is slightly below our through-cycle range of 17% to 20%, but it is on an improving 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, particularly in the first half in our ERP program. Adjusted EPS was 10.7p per share. We have held our interim dividend flat at 5.4p per share. Specific adjusting items amounted to GBP 18.4 million for the half and driven primarily by expenditure on our ERP system.

Let me now turn to a profit bridge to try and illustrate a little bit more what's happening with our margin. Firstly, we've shown on the left-hand side of the chart, the movement from the first half of last year to the second -- what you can see is that this is driven firstly by a number of one-off items that did not repeat in the second half. But principally, the reduction in margin was driven by volume and mix, where we saw a sharp decline in the second half in demand from industrial markets as well as declines in revenue from armor, semiconductor and health care that affected our margin mix.

Going from the second half of last year to the first half of this year, we can see a very solid improvement, driven by a 250 basis point contribution from efficiency and simplification programs, which substantially reversed the decline that we saw in the second half of last year. We did have some short-term operational issues that affected our margin in the first half, primarily in our Thermal Products business those products have been -- those problems have been substantially addressed, and we're now seeing an improvement in those operations. I would also note that we have successfully offset inflation through pricing of around 2% as is our usual practice.

And then finally, the payment under the take-or-pay agreement added 160 basis points to margin, excluding this operating margin in our first half would have been 9.6%, which I'm sure you'll appreciate is a significant improvement over the second half of last year. That is a result that gives us confidence in being able to make further progress towards our target of 12% margin by 2028 per the chart that Damien showed you just now.

Moving on to leverage and cash flow. I would firstly note that working capital showed an outflow of GBP 23.5 million during the period. This is quite normal for us. We tend to see an outflow of about GBP 20 million in the first half, and we expect most of that to reverse in the second. 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 projects.

We expect to spend around GBP 50 million in total during 2026. Exceptional items totaled GBP 15.2 million, comprised of GBP 11.5 million of costs associated with our ERP rollout and GBP 5.3 million of costs associated with restructuring, offset by GBP 1.6 million of gains associated with our shareholding in Foseco India. Free cash flow was, therefore, an inflow of GBP 3.5 million. 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 our disposal of the MMS business. As a result of this, we expect year-end leverage to be around 1.7x.

Just going to give a reminder of our capital allocation policy. So firstly, our target leverage remains in the 1x 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 1.5x to 2x range in the event of a compelling acquisition. Whilst capital investment remains a priority to support organic growth opportunities, we foresee limited need 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, then grow it in line with adjusted earnings once cover returns to around 2.5x. Once stabilized, we will consider the need to fund inorganic investment 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 margins.

Just finally on our outlook. We are mindful that 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. So that's my update. We would now be delighted to take any questions.

And maybe, Richard, let me start with the first 2 questions that are in the chat, and then I'll hand over for the next -- to you for the next 2, if that's all right.

The first question is a question around aerospace, and it says aerospace appears to be one of the strongest areas in the portfolio. How much visibility do you have on aerospace demand over the coming 2, 3 years? And are you seeing any constraints around capacity?

So yes, indeed, aerospace is an important part of our business today. It's also seen as Richard just described a significant increase year-on-year. It's been growing for the past few years. We do have visibility on the orders because of the natural nature of these orders, they typically come with up to 12 months anticipation, but also through our contacts and partnerships in the value chain, we also have a view of the order book of our users of the customers and our customers' customers.

So right now, as I'm sure most of the people who are familiar with this industry know there is a significant demand and a pent-up demand in the civil aviation environment. We're seeing customers and customers' customers approaching us to make sure that the capacity is there that we can support their growth, especially in the area of engine manufacturing, a lot of the larger engine manufacturers are actually struggling in their supply chain, not because of their own capabilities, but because of the capacities of their suppliers.

So for us, it's really a good opportunity to strengthen our partnerships to make sure that we can be there for their demand. And we are investing. It's one of the investments that I mentioned about bite-sized capacity increments is actually in preparation for the demand that we see coming. We are not capacity constrained at this time, but we're making sure that we can continue to grow with our customers and that we can be ready on time when their own demand increases.

The second question is where would you see the most attractive bolt-on M&A opportunities? So I'm not going to be specific in this because we haven't been specific publicly. But I'll maybe explain a little bit how we approach this. So we are looking for bolt-on capacity, bolt-on M&As that will help us either accelerate our penetration in applications, functionalities where we see opportunity where our products and our technologies play, but where our presence in certain markets may not be as strong as some as we would wish or as opportunity to expand along the value chain where we play.

We are in a very diverse environment. There is quite a few large -- small to midsized opportunities for us to expand. We have a very systematic, very programmatic approach to identifying, approaching and start nurturing these opportunities. Obviously, we're very selective and very rigorous in this approach, and we're also managing that together with the progress of the evolution of our portfolio. If it was going to be decided, the divestiture of our Thermal Products division would expand our ability to fund these types of inorganic moves.

This is for you, Richard, to answer the next 2 questions.

Yes. Thank you, Damien. So next one is what gives us confidence in achieving 12% margins by 2028. So we set the target when our run rate margin was about 9%. So you can think about this as a progression from 9% to 12%, driven by 3 courses of action, roughly in equal proportions. The first was site profit improvement plans that Damien has referred to. So this is a number of sites that have the opportunity to significantly improve their rate of profitability. Two of these have been actioned already, and we have 2 more to work on. And we are confident that we will be executing plans at all of those sites that will contribute that part of our margin improvement.

Secondly, procurement and other related actions that the group has not addressed before, where we think there is significant profit improvement opportunity. And in the case of procurement, that is about leveraging our scale to purchase key items across the group and therefore, generate value.

And then the third one was an assumption of revenue growth, but we really only assumed across this period maybe 2% revenue growth or so because we were not relying on a market recovery to get back to that 12% margin. Now there may well be a market recovery. That may well be very helpful, but we wanted to get back to that 12% level primarily through our own self-help. So those are the things that drive the market improvement -- sorry, the margin improvement.

I think the next question I have is why are you undertaking a strategic review of Thermal Products and what do we make -- what progress are we making? We have -- and if you look at our website, there is a presentation from our December 2025 Capital Markets event where we set out the financial framework for the business and for our individual businesses. And it's clear there that Thermal Ceramics, whilst being a very good quality business, it has growth opportunities. It has the opportunity to expand its operating margin has lower growth and lower margin opportunities than the other 2 businesses.

And therefore, we have to go through the thought process as to whether there would be a better owner of Thermal Ceramics an owner that may well have other similar businesses that would be in a better place to invest in the business' growth and ultimately accelerate the achievement of that business plan. So that's why we launched a strategic review.

We are making good progress. We are having to examine in detail all aspects of the options for the business, what would happen if we retain it and grow it and equally, what would happen if we sell it. And if we were to sell it, we are going through a review of legal matters, environmental matters, tax matters, as you might imagine, thinking about the valuation of the business and evaluating whether there could be buyers of the business. That is a lot of work to do. It is progressing very well, and we will make a decision as to what is the next step and announce that decision as soon as we are able. I mean, Damien, back to you for the next question, Richard.

Yes. Certainly, I'll take the next 2 and then back to you after that, Richard. So the next question is around -- is a follow-up question on wind. And you are outperforming the market in wind and have reported significant growth. What is next? And how are you planning on capturing this opportunity?

So it is true that we are growing faster than market, and we've been growing faster than the market in wind. And it is really for us, we see an opportunity to gain share by, as I mentioned, positioning products with higher performance and higher -- lower maintenance requirements. The approach to this is to combine, as I mentioned, the focus that we put on OEMs to make sure that we are in the first manufacturing in the first amount of these turbines, but also get -- generate some pull from the operators.

And here, this is really a very strong commercial approach where we are approaching the different operators of these turbines and making sure that the value that we propose is being represented. So we are -- have a very focused dedicated team that's working on increasing their share of this market and growing faster than the market.

The next question was, where are you seeing the strongest pricing power in your portfolio? And I'll answer this by saying that overall, we have good pricing power, and we've had consistently good pricing power. If you go back several years, we've always through COVID, post-COVID inflation periods, less inflation periods, been able to -- with a combination of pricing and continuous improvements that I mentioned to more than compensate the impact of inflation. And that applies to all of our businesses, to be honest.

So there is obviously sometimes in some parts of the business, places the situation is a bit more difficult. But I think really the important message is to remind -- to remember is that this is a business with good, solid demonstrated continuing pricing power.

Typically, it takes an effort to be qualified in the application where we play. But then we have a significant strategic moat where the effort to requalify somebody else is quite large. The cost sometimes, including and sometimes it can be -- is quite large and sometimes very large. So you end up more playing -- if you abuse your pricing power, playing your chances on the next generation, then you really play your chances on this very specific supply that you provide.

So the qualification is important. The effort to requalify sometimes the certification that comes with it and another important part of our strategic moat that doesn't apply to all our business, but a significant portion is the fact that we tend to be in places where there is a certain level of sovereignty that's attached to the product, obviously, in defense, but also in semiconductors and to some extent, in civil aviation. Back to you, Richard.

So question around margins. So how do you expect to maintain the underlying adjusted operating margin in H2 as the 160 basis points benefit from the GBP 8.9 million semiconductor payment falls away? And what are the key operational drivers supporting that performance? That's a good question.

So to recap, excluding the semiconductor item, our margin in the first half was 9.6%. We expect a margin of about the same in the second half. To a degree, we kind of need to repeat the first half. So we're not expecting to have a materially different level of sort of revenue or underlying performance. But I think the one thing that will help, in particular, is we did have, as we said, operational issues within Thermal Ceramics in the first half. Those are being progressively worked upon, and we expect a better performance in the second.

And then things like efficiencies and other savings programs, they continue. So we're likely to do a little bit better in the second half than we did in the first. So nothing dramatic, but those sort of improvements will help our margin in the second half.

That's great, Richard. Damien, if I may just jump back in there, thank you for addressing those questions from investors today. But Damien, before I redirect investors to provide you with a feedback, which is particularly important to yourself and the company, could I please just ask you for a few closing comments?

Yes, absolutely. So I mean, essentially, there is 4 points that I'd like you to remember from today is the fact that, first, we have a clear plan to achieve our 12% growth target in 2028. We are on track to achieve this. We're seeing significant progress in all the levers, including improvement of our revenue, including encouraging progress in all the growth areas that we've selected, including progress on the site turnaround that we selected as well as in the establishment of our procurement initiative and procurement organization.

We've also progressed with the implementation of an ERP, which is 1/3 complete as of the end of July, which has been progressing as expected. So we can see how the different parts of our strategic direction are coming together. The agenda is ambitious that the Morgan team has really embraced it. There's strong energy, strong engagement, which is also reflected in our recent engagement survey, and we are very confident in our ability to transform, drive and maximize the portfolio, get to the 12% margin target by 2028 and 14% beyond. Thank you very much for your interest and your questions today.

Fantastic, Damien and Richard, thank you once again for updating investors today. Could I please ask investors not to close this session as you now be automatically redirected to provide your feedback, which will help the company better understand your views and expectations. On behalf of the management team, we'd like to thank you for attending today's presentation, and good afternoon to you all.

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.

Hello, everyone, and thank you for joining the Morgan Advanced Materials Full Year Results 2025 Call. My name is Lucy, and I'll be coordinating your call today. [Operator Instructions] It is now my pleasure to hand over to Damien Caby, Chief Executive Officer, to begin. Please go ahead.

Thank you, Lucy. Good morning, everyone. I'm Damien Caby, 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 levers ], 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 remained 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, offsetting 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 at 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 announcement released earlier today provides our views on the outlook for 2026. I will come back to that at the end of the presentation.

I'll now hand over to Richard.

Thank you, Damien, 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 GBP 1,030 million, reflecting a 3.3% drop on an organic constant currency basis. Following a decline of GBP 5.3% in the first half, revenue in the second half was broadly flat year-on-year, which points to a degree of stabilization 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 GBP 33 million, demonstrating the resilience and stability of the rest of the business. Group headline adjusted operating profit, which includes GBP 5.3 million of MMS operating profit predisposal, was GBP 99.1 million, a reduction of GBP 29.3 million, giving an adjusted operating margin of 9.6%. Return on invested capital was 14.1% slightly below our through-cycle range but still delivering an attractive return.

Headline free cash flow was an inflow of GBP 45.4 million, which shows an improvement over last year as we continue to improve our working capital. Adjusted EPS was 15.9p per share, and we have held the total dividend for the year flat at 12.2p. Specific adjusting items amounted to GBP 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 stabilized 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 Defense was slightly down year-on-year due to the timing of some large defense 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 stabilization is also visible. The impact on operating margin of low 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 2 years and was able to achieve revenue growth during 2025. The main driver has been aerospace and defense with growth of 22% in that sector, driven by the demand for new aircraft, along with robust maintenance revenue, driven by increased fleet utilization.

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 health care, which was affected by lower volumes for some mature product lines and semiconductor, which followed the market downturn. Operating margin also remained 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 lower investments 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 U.S. business, which negatively impacted margin by 1 percentage point, then FX and hyperinflation accounting in Argentina causing a further 1 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 U.S. business.

Turning now to the profit bridge. We can firstly see a negative FX impacts arising from the progressive weakening of the U.S. dollar versus sterling, with total FX reducing margin by 40 basis points. The average U.S. 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 the mix 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 GBP 11 million expected this year. Pricing of around 3.5% served to offset inflation of around 5% on cost of goods sold.

Our simplification program is nearing completion, GBP 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 3 years, coupled with our planned optimization 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 GBP 47.6 million. The largest item was a noncash impairment of GBP 15.6 million in relation to our semiconductor assets in the U.K. This is part of the previously announced GBP 60 million capacity investment and represents equipment that is devoted to specific product raise for which demand is currently uncertain.

Costs associated with our business simplification program amounted to GBP 13.4 million. Implementation costs to date amount to GBP 35 million, for which we have delivered benefits of GBP 24 million. Once complete, we expect total cumulative savings of GBP 27 million for implementation costs of GBP 40 million, which is in line with our original projection when the program 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 GBP 13.3 million incurred on design and configuration in the period. We expect to incur around GBP 20 million in 2026 before the program starts to wind down during 2027. We have also recorded a movement in the fair value of our shares in Foseco India Ltd as at the 31st of December of GBP 7.2 million, which values our holding at GBP 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 GBP 54 million.

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 GBP 50.4 million. This comprised an underlying improvement of circa GBP 13 million, resulting from a strong focus on inventory and receivables management, supported by a further GBP 38 million of nonrecourse working capital arrangements.

Net capital expenditure amounted to GBP 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 GBP 22.8 million, comprising simplification costs of GBP 10 million and investments in our ERP rollout of GBP 13 million.

Free cash flow was therefore an inflow of GBP 45 million. We did receive a net GBP 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 program in early January. Net debt finished at GBP 232 million, excluding lease liabilities, in line with our expectations and representing 1.8x 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 1 to 1.5x. We're focused on correcting that, and we'll bring leverage to around 1.5x over the next 2 years. Our target leverage, therefore, remains in the 1 to 1.5x range in relation to ongoing operations. And as before, we would consider increasing this in due course into the 1.5x 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 a dividend for now, then grow it in line with adjusted earnings once cover returns to around 2.5x.

Once stabilized, we will consider the need to fund inorganic investment 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.

Finally, I will move on to technical guidance. As noted, we expect capital expenditure of around GBP 50 million. Our net finance charge will be around GBP 24 million, increasing 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 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 1.7x.

Thank you. And I would now like to hand back to Damien.

Thanks, Richard. I'd like now to shift the focus towards the future. I'll start by reminding you of our path forward as a group. We have a clear strategy to unlock our potential. It is founded on 3 levers: transforming operational effectiveness, driving stronger growth and maximizing portfolio value.

In transforming operational effectiveness, we moved beyond continuous improvements by addressing underperforming large sites to reduce cost and enable growth, by leveraging the group's scale for back-office efficiency, and by enhancing business analytics for faster, better informed decision. To drive stronger growth, we pursue more proactive programmatic customer collaborations and expansions in selected markets, focusing where we have the strongest right to win and continually improving it.

To maximize our portfolio value, we are shaping our portfolio to focus on the markets and on the applications where we have or established advantaged and integrated positions. Our goal is to ensure that our resources are focused where we can create the greatest study. One avenue to achieve this is to set up partnerships along attractive value chains where we want to increase our competitive strength. Another avenue which we're pursuing is to actively manage our portfolio of businesses with bolt-on, M&A and divestments where we're not the best owner.

In the near term, our road map will achieve 12% EBITDA margin by 2028. This will be largely driven by the first 2 pillars of the strategy, transforming operational effectiveness and driving stronger growth. We have also initiated the actions which will bring margins further up in the medium term, reinforcing collaborations with key customers, building up and progressing our pipeline of organic and inorganic adjacencies.

Our teams are focused on executing our road map and moving at pace. This chart summarizes the key progress milestones of the past 3 months and some of the next steps. Starting with Transform. In procurement, Michael has to join us on February 1, reporting to me. He brings a strong experience of setting up and leading procurement organizations in specialty industrial companies. He will establish group-led procurement at Morgan, deliver early wins in selected categories during the second half of this year.

Turning our large underperforming sites. In the second part of 2025, we consolidated ceramic fiber manufacturing in the U.S. into one site. Rationalization of our make-to-stock product portfolio is 70% complete. The commercial cross-qualification of our manufacturing lines has started with the objective to further optimize asset utilization in the course of next year and to achieve productivity improvements.

The planning for the other large sites is progressing well, and the implementation will start in Q2 at the second site. We are confident that the procurement and site turnaround initiatives will deliver at least GBP 20 million of margin improvements by 2028.

In back office, since December, we've expanded the scope of our European shared service center to include finance back office activity for our U.K. sites. And in digitalization, our new enterprise-wide ERP was implemented at a pilot site last year, and we are ready to start full deployment this spring in successive waves across our businesses. This will be carried out in a sequence designed to quickly improve costs and margin management and to optimize product flows and working capital across our network.

Turning to driving growth. Dedicated teams have been set to drive stronger growth in selected markets and are acting at pace. I will report on their progress in future earnings calls. I am pleased to see early benefits from initiatives launched in 2025 with projects in low-carbon steel making and improvements in on-time delivery at sites manufacturing replacement parts.

We have decided to deploy capital in selected high-growth areas. These are bite-size customer-backed capacity increases. We're expanding our armor capacity to scale up our supply backed by government contracts. We're increasing capacity for parts used in iron implantation in semiconductor fabrication to support the increasing demand and localization strategy of existing customers.

To maximize our portfolio value, we're pursuing partnerships along our strategic value chains. An early achievement is in fire protection in the Middle East, where we've been teaming up with local duct manufacturers. We have worked with a number of them to design, qualify and certify their fireproof smoked extraction ducts with our fire wrap system to meet more stringent fire ratings, and our revenue has increased by 60% in 2025.

Last but not least, we're announcing today that we have commenced a strategic review of our Thermal Products division. At our Capital Markets event in December, I laid out our clear path for this division to deliver GDP growth and sustain 8% to 10% margins. It consists of the optimization of asset utilization, the turnaround of the performance of the largest side, growth in high-value segments.

The execution of this plan is progressing at pace. A review we're announcing today will assess a full range of options, including a potential disposal to maximize the group's margin and growth profile, and to ensure that our resources are deployed where they can deliver the strongest long-term returns. Further updates will be provided in due course.

Looking forward, our outlook for 2026 is unchanged. With stabilizing end markets, we expected organic constant currency revenue to grow at 1% to 2%. We're seeing continued growth in aviation and defense and positive trends in power and rail. We're seeing slightly improving project activity in petrochemicals and in the processing industries, but continued weakness in Europe, in health care, and in semiconductor sales, where we are benefiting from the rebound in silicon, which starts to offset continuing inventory adjustments in silicon carbide.

Supported by our established track record of efficiency improvements, which contributed 1.7 points in 2025 and the first results of our operational transformation initiatives, adjusted operating profit margin will return to around 10%. Leverage will start to return to our target range. As you can see, we're moving at pace on all our strategic levers, and we remain confident in our financial framework.

Thank you. That ends our formal presentation, and we will now take questions. I will hand back to the operator to coordinate that.

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

Just a few questions for me. First one being, Richard, on working capital, how do you see that playing out through '26 based on your revenue guidance?

The second question is about thermal products, sort of why announce now, given the strategy update was in December. It was sort of obvious that it's lower growth, lower margins, but has that been a catalyst for you to announce that now? Or is it just a case of freeing you up to do something with it? And then the last question is regarding the Foseco stake that you have. I think I remember you tied up to the end of the half year, and I assume you plan to dispose of that holding. Is that the case?

Scott, firstly, on working capital assume flat year-on-year for this year, I think. Secondly on Foseco, we have a lockout period until towards the end of June. We do then intend to sell down our holding over a period of time. That will depend on market conditions, and we are preparing actively a plan to help us do that. I'll ask Damien to comment on the thermal question.

Yes. Thanks, Scott. So as far as the timing of this announcement. So if you remember, in December, we announced that we were going to take a proactive approach to our portfolio, and we laid out a clear plan for thermal. Thermal is delivering on this plan at pace. We've been, in the meantime, very proactive and very -- and moving at pace on making the first steps of assessment of this strategic review. And we've reached the point now given the complexity of this business that it is time to move forward to the next phase. So it's really the result of us following up on our commitment in December and moving at pace. Richard?

Just a quick follow-on. Is that business disposable though? Like is it -- have you separated it clearly? Can you dispose of it? Or is there some work to do there?

Thanks, Scott. We've done some preliminary assessment. We believe if the decision were made to dispose of the business that it is relatively separable, but there is still a considerable amount of investigation to do.

The next question comes from Jonathan Hurn of Barclays.

Just a couple of questions from me, please. Firstly was just on the semiconductor market. I wonder if you could talk a little bit more about that and obviously, the 2 sides of that business. Just maybe firstly just on the silicon side, what kind of sort of rates of growth are you seeing in that business? And what's the opportunity to get further penetration of customers there? And on the silicon carbide, is it still your view that, that market starts to pick up in 2027? That was the first one.

The second one was just sort of following on Scott, in terms of thermal products, like you say, you've done work on it. But can you give us any color on what you think the potential tax leakage of any sale could be? And also, if you do sell it, is there any sort of impact on the wider pension?

Thanks, Jonathan. So I'll start with the semi-silicon over Semicon question and Richard could pick up the second question. So we're definitely seeing a strong rebound in silicon semiconductor, which by now represents approximately, I mean, more than half of our semiconductor business. I mean, the industry is reporting 20% growth rate. The growth rate that we are seeing with our products is lower than this because part of the growth in the market is tied to a mix improvement in the quality of the wafers. And for us, it doesn't make a big difference.

So we're seeing this. We are well placed with customers who are used to buy our products along the manufacturing chain of this. And depending on their inventory positions and their own demand, we're seeing the rebound in this part of the market. As far as silicon carbide is concerned in 2027. I'd say that this is still a very dynamic market in -- especially in the main regions where we're supplying, which are Europe and the United States.

So -- we have -- as Richard mentioned, we've seen some stabilization last year. We're managing this and staying attuned to the market. And as I said as well in the capital market event, looking for ways to expand our position via partnerships in China where this market is really moving big time, at least the early part of the value chain.

Jonathan, regarding potential tax leakage, we have made an estimate, albeit we would like to do more work on it. It points to a number that's fairly middle of the range in the scheme of these things. It is not a number that we think would prevent the sale, if it were to progress being value accretive.

Impact on pension, there is a limited connection between the business and the U.K. pension fund, so not a particularly high exposure. We are going through a process of consultation with the relevant pension funds and other stakeholders as we're required to do.

The next question comes from Harry Philips of Peel Hunt.

Several questions, please. Just trying to get some thoughts around the broader semicon sort of profile in terms of where this year profitability might go in terms of you've written down, obviously, part of the asset. I was just wondering when you -- when you consider this GBP 7 million sort of headwind that you potentially had, how that might reduce on the write-down? And obviously, if you don't commission everything fully, then clearly, just wondering how that sort of profile plays out in '26 and '27?

Similarly, just in terms of the sort of time line, if you like, for the transform process and the timing of those cost savings? And then maybe accompanying that along with the ERP, the sort of restructuring cash you might incur this year? And then very finally, just noticed in the working capital comment, the use of sort of factoring and what have you. Just wondering thoughts behind that? And when you talk about working capital being neutral in the current year, does that assume sort of the factoring is a sort of one-off move in the year just gone? Or is that sort of more actively being pursued, please?

Harry, 4 questions in 1 there. Very good. Thank you. So Semicon, I understand the question. So as Damien has alluded to, the supply chain into what you might call the traditional Semicon market primarily for silicon chips has picked up a little. We are expecting a little bit of an uptick of that during the year. And right now, we would anticipate probably commissioning the remaining assets in our program towards or around the end of the year.

So I'm not going to be specific around what that commissioning costs will be, but it's not GBP 7 million is probably the order of GBP 1 million or GBP 2 million, something like that towards the end of the year. You mentioned ERP and restructuring. So ERP of around GBP 20 million, restructuring a little bit based dependent on timing, but sort of GBP 2 million to GBP 4 million, something like that. So in that range of GBP 22 million to GBP 24 million for the year, I think.

Working capital. So underlying, we would expect to be roughly flat across the year and the factoring balance also to be relatively stable. Now each of those could move by a few million pounds, but broadly neutral. The thinking behind the factoring was that we set out some time ago to establish a number of flexible financing facilities.

So as you know, we have some fixed debt maturing this year. Interest rates are still relatively high. So we wanted flexibility in our financing, and actually, this working capital financing is attractive in terms of pricing. So typically, at a sort of all-in interest rate of 4.5% to 5%, whereas to replace fixed debt at the moment, it could well be above 5.5%. So that was the thinking behind that.

Fantastic. And then just to sort of transform potential benefits to get to that GBP 20 million by '28?

Yes, we're moving at space on this, Harry. So we're going to start to see some benefits in the second half related to procurement and the ramp-up will continue through 2027. We're very confident that we will get to the GBP 20 million by 2028.

[Operator Instructions] The next question comes from Andrew Douglas of Jefferies.

Just a quick one for me following on from Harry's questions. Can you just talk to me about ERP costs post '26, you say that there's a ramp down in '27. Can you just give us a rough indication of what '27 does? And is it fair to assume that there's nothing in '28? Or is it a slow steady measured decline?

The answer for 2027 depends a little bit on the speed of our rollout. So I might write this minute expect GBP 20-ish million to be coming down to maybe GBP 15 million or something like that, but we'll have to come back in due course. 2028 would, if anything, be a tail end few million pounds, I suspect.

The next question comes from Mark Fielding of RBC.

Just a couple of follow-ups to the earlier comments. In terms of the thermal products review. Just can you give us a bit more thoughts around the time line for the next update and what we would be expecting of that? It feels like you've obviously thought about disposal option, but it's relatively early in that planning process. So is it --- is the next update more going to be a fix like this is what we think we're probably going to do? Or could we be further advanced at that point?

And then secondly, in terms of the wider portfolio, obviously, this is a big chunk of the portfolio following out from the Molten Metal Systems. Is that the end of the portfolio streamlining? Or is there more that you are thinking about and reviewing in the business?

Okay. Mark, thank you. Regarding the time line, so as you've noticed, there's been a real concrete rigorous work done before we made this announcement. The thermal business is a complex business. There is 30 subsidiaries. There is a number of JVs. This is the step that we are moving into now is a complex and an important step. As you've seen, we're really moving at pace. On the other hand, we have to remain rigorous and focused. So we'll provide an update in due time.

As far as the wider portfolio is concerned, we will continue to review how to maximize our portfolio value moving forward. As you can imagine, this strategic review is going to be an important effort for us to carry out in the short term.

The next question is from Harry Philips of Peel Hunt.

Sorry to come back again. But just sort of tidying up on various bits and pieces and sort of slightly in keeping with Mark was just saying about possible disposal. But obviously, the central cost line has gone up to GBP 10 million. Is that a sensible number? Is that a sort of annualized number we should run with going forward?

And then clearly, that's quite a step-up from where it was pre the exit of MMS. I'm just thinking about if thermal goes, is that sort of a point in time when -- if it goes rather, there's a sort of material change to that central cost line?

Thanks, Harry. Yes, it's a good question. The increase is driven by IT. And I suppose you could describe it that we're going through a hunt in which the underlying running costs of our new ERP system and other things that we're investing in, bearing in mind that the transform program that we defined in December includes trying to make rapid progress in making use of digital tools, creates a sort of hump in expenditure for a couple of years.

There comes a point where we can then start to remove some of the legacy costs of IT in the business and perhaps that comes down. So I think that's the best way to do it. I'm not going to say what it's going to come down to, but we're going through that period of one, replacing the IP, but also investing heavily in digital tools to help us transform the business. As to what happens should the disposal of thermal go ahead, that's part of what we will investigate in the next phase of work.

Okay. And then just to be -- so for sort of modeling purposes, just running a 10, 11, is that just a sensible assumption or just might it -- given the level of activity you've highlighted through the presentation, might it spike up a fraction this year? I suppose what I'm trying to get at it is the guidance is, as you've laid out, what's sort of central cost line assumption within that?

We wouldn't expect a further increase.

[Operator Instructions] We have no further questions at this time. So I'd like to hand back to Damien for closing remarks.

Thank you. So key messages for today, resilient performance in the backdrop of challenging market conditions, outlook for a revenue growth of 1% and 2% in end markets, which have stabilized. And we're executing our strategy at pace. We're making headway in all the levers and focusing on maximizing our portfolio value with the sale of MMS and the initiation of a strategic review for Thermal Products division. Thank you very much for attending this call, and good rest of your day.

This concludes today's call. Thank you all for joining. You may now disconnect your lines.

Welcome to the Morgan Advanced Materials Strategy Update. My name is Ian Marchant, I'm the Chair, and I'm just literally going to set the scene before I hand over to Damien, our Chief Executive; and Richard, our CFO, who I'm sure you all know. So I believe that we at Morgan have the potential to be a leading force in our chosen markets, and that's within reach. Why do I believe that? Because we've got the capabilities and clear differentiators that have been laid over the last century.

It's not many companies that can look back over that length of time. And they form our strong foundations. I do recognize that the last few years has not been an easy time for the company, but we're going to set out today a clear multiyear strategy to improve operations focusing on our larger sites, improve asset utilization, drive stronger, higher-margin growth and actively manage the value of our portfolio.

And the strategy will be able to enable us to unlock our potential and be a leading force in the markets in which we operate. So I'm confident in our prospects that we've got the right team to help us deliver. But actually, you don't want to hear from me, you want to hear from them. So welcome, and over to you, Damien.

So thank you, Ian, and thank you, everybody, for taking the time in being here today. It's a pleasure to have you. Everything I'm going to be talking about today is about becoming the leading force in our chosen markets. And I'm really excited to share with you our strategy on how to get there. After that, Richard will be covering the financials. We'll have some time for Q&A, and I hope some of you stay with us for informal discussions over drinks.

So there are 4 points that I would like you to take away today. We're setting a clear path to achieve 12% margins by 2028. We're focusing on our right to win to drive above GDP growth at higher margins. We're executing distinctive strategic mandates for each of our divisions, and we're maximizing portfolio value to sustain 12% to 14% margins further out. Many of you are familiar with Morgan, so my introduction will be short about the company. And I won't start with products and markets. We felt it would be good to start with our impact.

[Presentation]

So I hope that gives you an inspiring view on how we impact the world and how we're uniquely positioned to power progress that truly matters. And we're passionate about it. So clearly, this is a fantastic business, and we will make it even better. But before I explain how we do that, I'll just give you a quick snapshot of where we are today.

So we're the global leader in advanced materials with a turnover of GBP 1 billion, a global network of 57 plants and approximately 8,000 employees. Our core capabilities for which we're well known and sought after are material science, deep application expertise and co-design and manufacturing excellence. Our customers trust us for supplying mission-critical solutions.

At the core of our activity, there are technology demanding applications of advanced ceramics, graphite and carbon. These are very versatile materials. So we formulate and we process them to tune their porosity, their hardness, their electrical conductivity, their thermal and their chemical resistance, their mechanical strength and many other physical properties.

And that leads us to supply around 3,000 combinations of minerals and applications. So as you can imagine, in a business like this, agility and customer intimacy are critical factors. And this is why our 3 divisions are the backbone of our operating model. They're set up to have short operational decision-making processes and to be in close proximity with our markets and with our customers.

This organization also drives agility and it drives performance. The divisions have full accountability for their P&L. Let me now bring to life what we do and how we differentiate with 3 examples. Take the first example in aircraft engines, where we turn graphite and carbon into safety critical seals which have to adhere to strict aerospace standards. The simple thing -- seals, they look simple, but they're not. There is a lot of material science and process know-how that goes into them from raw material selection to mixing, pressing, heat treatment, testing and inspection.

Second example is in health care diagnostics. Here, our differentiation is our ability to manufacture specialized ceramics metals assemblies to operate in high voltage and high vacuum environments. The quality of these assemblies is the critical piece to the performance and the precision of the imaging systems. The last example, I'll take a recent innovation in automotive. For combustion engines, when the new European regulations were announced, there was no ceramic fiber available in the market that was able to comply with the new limits.

So within 24 months, we developed a new ceramic material to solve this problem, and we were able to crack this in time for our customers. That's because we have the material science, the rapid prototyping and the capability to test according to the industry standards. So all these 3 examples show how our closeness to our customers, our technology expertise and our ability to solve problems create value for our customers.

And these collaborations create loyalty and trust for years, sometimes for decades. Another strength is that we are diversified across end markets and applications. So today, I'm sharing this breakdown of our business by market. It's a different chart to the one that you've seen before. And my intention here is to provide more clarity taking on board your feedback.

And I'll refer to it in this presentation later when I'll comment on executing our strategic priorities for each of the divisions. A few things to note on this chart. Approximately 40% of our business is exposed to manufacturing investment cycles. That means that during market recovery, we grow faster than GDP.

Conversely, during recession, our growth is more subdued. It's also important to understand that within these markets, there are a range of end market dynamics. If I take the example of industrial components, you have parts for water purification. You have parts for automotive, like I just mentioned.

You have parts for analytical equipment. And each of these have their own market dynamics, and that contributes to our resilience. Now in addition, this diversity of end markets opens a lot of opportunities to grow. So I've talked to you about who we are, how we create value with technology and about our diverse end markets.

You've seen how these key capabilities come into play to create value with the examples and how our market position are underpinned by strong and clear differentiators. I've been with the business 3 years now. And since my appointment as CEO, I've had time with all our senior leadership and our broader teams. And I've been so impressed by our winning culture.

We thrive when it comes to solving tough problems. We embrace challenges, and we are resilient and united as a team. So what has held us back? There is a clear and consistent thread to where we're limiting our own progress. Our supply chains are not sufficiently effective, and they are not efficient enough either.

This hold backs our service levels, constrains our growth, leaves margin on the table and above all, it distracts us from executing. We've positioned ourselves in growth markets, but we have not been sufficiently disciplined and proactive in leveraging our right to win. And we have not been sufficiently upgrading our position in the value chain to grow irrespective of market cycles.

It is my priority together with the executive team and our senior leaders to address these areas and unlock our potential. We can be the leading force in our chosen markets. A successful growth agenda starts with how we can unlock our customers' ambitions and serve their needs.

I had the privilege of meeting several of them, and we've also been listening to their feedback, looking at their feedback. We asked 300 of them what they thought of us and the message was consistent. Our product quality and reliability are excellent. In many cases, they are unsurpassed. However, there is a real opportunity to improve both our lead times and our delivery performance in these areas we're not best-in-class.

Our customers expect better from us. We can and we will do this. As you can see to the right of the chart, the customers we survey also want a more strategic relationship with us. We have the strategic relationship with half of them already, but we have many more opportunities to build more collaborative relationships.

Soin summary, our customers are telling us 2 things: Step up your game in delivery performance and move toward a more extensive, higher-value collaboration. You don't have to take my word for it. Actually, we invite you to take a moment to hear from one of our customers, John Crane. We asked Mike Eisen, their CTO, about his experience of working with us. Let's see what he has to say.

[Presentation]

So what is the way forward for Morgan and how do we unlock our potential? Our strategy is simple, and we have 3 clear levers. First, we want to transform our operational effectiveness. We have a well-established and successful practice of continuous improvement. It has delivered at least GBP 10 million per year of manufacturing efficiency savings. We will now go beyond this. We'll be more holistic, and we will leverage our group scale to transform our operation effectiveness. And we will address the performance of a few large underperforming sites.

These actions will improve our costs, and they will help us grow. But to really drive stronger growth, which is our second lever, we need to be more proactive and programmatic in strategic collaborations with our customers and other stakeholders in the value chain in order to expand our value proposition. And we need to focus our efforts where we have the strongest right to win and consistently upgrade this right to win so that we can grow irrespective of market conditions.

Our third lever is to maximize our portfolio's value. We've carried out a thorough review of our products and applications with a focus on assessing the market attractiveness and the strength of our right to win. We will actively manage our portfolio and pursue bolt-on M&A to support and accelerate a step change in market position where there is a clear opportunity or where we determine that we're not the best owner for the business, we'll seek to divest.

So let's now look at these levers in detail, and I'll start with operational effectiveness. This is all about making more of the group's scale and of its digital transformation. There is a significant opportunity in procurement, which is currently the responsibility of individual sites or business units. In the past few months, we've collected and consolidated data at group level, and we have determined where to focus our efforts. We've also implemented information systems to provide real-time consolidated insights about our spend.

We can now deploy group-led category management. Initially, we will target GBP 170 million of indirect procurement spend. This will deliver significant savings and reinforce the reliability and the efficiency of our supply chain. We're also implementing transformation plans for underperforming larger sites that represents around 20% of the group revenue.

These are structured, comprehensive multiyear programs. They focus on the optimization of the production cycles, the simplification of the asset base and of the product lines. Together, these actions, which are in addition to our existing programs of continuous improvement, will deliver EUR 20 million margin improvement by 2028. We're also investing in the digital transformation of our back office. All administrative activities will be done through standardized processes to ensure consistent service reliability at the optimal cost.

We've already implemented change in selected countries in accounting and in payroll. The pace will accelerate with the deployment of our centralized ERP system. This transformation will enhance our business analytics. Our decisions will be better informed. Margin improvement opportunities will be identified faster, and we will be more agile. I want to be clear, these are not simply cost improvement projects. They support and they enable growth. They make our business more scalable, and they allow us to leverage that scale.

So let's talk now about how we're going to drive stronger growth. Here, it's about leveraging our right to win and constantly upgrading our position in the value chain. We're doing this already, and that's why we know that it works and that it creates value. Our strategy is to do this in a proactive and programmatic way. I'll give you 3 examples. The first is where we can develop the scope of our supply from a single component to a multifunctional subsystem.

Imagine the rail system in North America in winter. You have arctic temperatures, freezing pantographs. If you're the operator, you don't want electric current to be passing through ice. So what you typically do is you purchase a heating system from a specialist engineering company and you bolt it on to the pantograph. We developed a heating system to be integrated into the collector strip for one of our customers, RTD-Denver.

Now the collector has become a higher-value subsystem. It simplifies sourcing and maintenance activities. We've sold it to other operators, and we are developing similar system upgrades for other customers. The second example is our ability to co-develop a technology that enables game-changing advancements of the end product. We're doing that -- we've been doing that in aerospace, where we developed a new process and material solution that allows our customers who are the engine manufacturers, they are specialized casting house to generate complex cooling channels in the turbine blades and veins of a modern jet engine.

These more effective cooling channels are a critical enabler of the higher fuel efficiency of new generation engines like GE's GenX Series, Safran's LEAP engine and Pratt & Whitney's geared turbofan family. A third example is where we established a right to win via structural partnership along the value chain.

We're seeing that in fire protection in the UAE, where the enforcement of a more stringent building fire regulation has created a compelling value for our ceramic fiber technology. We can't sell this ourselves. We don't have the network. So we're joining forces developing, marketing and scaling up this a new compliant DUC system with leading fabricators who are local, well established and operating at scale with building companies, engineering houses, architects.

These are just 3 examples of how we're strengthening strategic relationships to drive stronger growth. We're now being more proactive and more programmatic on these opportunities. Here is how we've decided on our focus as we do this. As I said, we've carried out a thorough review of our products and applications with a focus on establishing the market attractiveness and the strength of our right to win. This systematic approach is new to Morgan and is already driving decisions in our business.

We determined that our crucible business was in an end market that was relatively less attractive to us and that there was not enough potential for us to enhance its right to win. We sold the business. In Semicon, we're making a clear distinction between material growth and wafer fabrication, which are 2 different parts of the value chain with very different dynamics. For material growth, although there is a large and growing market, especially in silicon carbide, the supply chain is experiencing a shift to China.

We remain committed when the market returns to supply our customers in the U.S. and Europe. The highest purity products, which we provide them are critical to the differentiation of their materials, but we have adjusted our growth expectations, and we are redeploying some of the new capacity to other markets. We're focusing on the wafer fabrication part of the value chain. It is dominated by American, European and Japanese OEMs and the barriers to entry are high.

We're supplying most of them, ASML, Applied Materials, [indiscernible] Lam in various parts of their process. Our goal is to deepen our collaboration, working as one enterprise and expand the scope of our supply. You will see other examples of these portfolio choices I come on to talk about our divisional priorities.

So let me recap shortly on our 3 strategic levers. We're taking transformational steps in operational effectiveness by leveraging our scale in supply chain and back office and by focusing on fixing a few large underperforming sites. We will rely less on the underlying growth of our markets. Instead, we will drive margin-enhancing growth through a much stronger alignment with our key customers and channel partners.

We're shaping our right to win and optimizing our position in the value chain to maximize our portfolio value. What I want to do now is to provide some color on the implication of this strategy and its practical implementation for each of our 3 operating divisions.

I'll start with Thermal Products. In Thermal Products, the majority of sales are in process industries, which are mature, more competitive cyclical markets and currently at a trough. We set the benchmark in these markets in installation standards, and we benefit from a large installed base. So the objective for this cash-generative division is to optimize cost, enhance delivery performance and expand in high-value segments.

In transforming operational effectiveness, Thermal Products already has a strong track record in deploying the best manufacturing practices across its global network. An additional focus now is on asset utilization, which is targeted to improve significantly already in 2026. We also have a phased program in progress to turn around the performance at our largest site, where we expect progressive improvements in revenue and margins to continue over the coming 3 years.

To drive stronger growth, we're reinforcing our outreach in the process industries to enable the decarbonization of steel and chemical processes. For example, we've been selected by one of the largest petrochemical plants in North America to supply insulation for the construction of their low-carbon plant.

To maximize value, we have set up structural partnerships in fire protection. This is a very large market, and we're targeting the geographies and the applications where the value proposition is compelling. The mandate for Thermal products is to deliver GDP growth and sustained 8% to 10% margins. In Performance Carbon, our products are critical to pumps, motors, generators. They are essential components that form the backbone of many industrial systems, and we have a large installed base.

We're also in highly regulated markets such as aviation, rail, defense, and this provides a high barrier to entry. Our leadership position across these markets underpins our high margins. The objective here is to constantly renew our differentiation, extend our leadership in mature markets and expand the addressable market. As part of our transformational program, we're improving our lead times and enhancing our ability to serve the aftermarket.

Our teams are already pushing here. To drive stronger growth, we're capitalizing on our reputation and innovation in armor by expanding to other defense systems. We're adding incremental capacity next year to fulfill multiyear contracts. And as we maximize our portfolio values, industrial seals is a significant opportunity. The supply chain is very fragmented and can be optimized for efficiency.

There are new technology demanding applications driven by the decarbonization and digitalization trends, which call for innovation as we've heard from John Crane. And we're exploring ways to move parts from parts to subsystems as we've done in other markets. Remember the pantograph. The mandate for Performance Carbon overall is to deliver GDP plus growth and sustained 14% to 18% margins.

In Technical Ceramics, we're positioned in large, attractive markets like aerospace, defense and health care, and we hold leadership positions in specific niches that can be leveraged for adjacencies. The objective of this division is to optimize the manufacturing network, bolster our leadership positions and grow our market share.

We're transforming operation effectiveness by rebalancing production among sites and optimizing the capacity and capabilities and costs across the networks. Driving stronger growth starts with extending our leadership position in ceramic cores for engines in the aerospace and defense market. We understand our customers and their customers as well, and we're investing in capacity to meet the progressive ramp-up of aircraft deliveries in the midterm.

In maximizing our portfolio value, we're leveraging our expertise in high-value niches to expand into new adjacencies with priorities in industrials and aerospace. Across our divisions, we see the largest revenue growth potential for technical ceramics. The mandate for this division is to target 12% to 16% margins.

Lastly, I want to give you a sense of the time frame. In the near term, we will benefit from the initiatives, which are entirely in our gift to execute, leveraging the group scale and digitalization for cost and efficiency gains, increasing our market share by improving delivery performance and with additional channel partnerships.

Together with the drop-through from a modest market recovery, we target 12% margins by 2028. Beyond that, we will reach 14% through building on leadership positions to expand into adjacencies, deepening our position in the value chain and portfolio management. This strategy provides us with a clear road map to be the leading force in our chosen markets. We have the right structure, the right team to execute this agenda.

I will now hand over to Richard.

Thank you, Damien. In this part of the presentation, I'm going to convey 4 important messages. We have a clear path to a 12% sustainable operating margin by 2028, driven by our focused strategy and self-help actions. We have a clear capital allocation policy with a near-term focus to invest in the businesses outlined, continue to pay our dividend and to reduce leverage within our stated range of 1 to 1.5x.

We have strong conviction that cash conversion will improve as investment normalizes, providing the opportunity for additional investment and returns in due course. And we have updated our financial framework to reflect the opportunity for value creation as well as the reality of our end markets. In thinking about our margin target, we have taken a cautious approach with regard to end market recovery and are not planning for a recovery until late 2026.

We will, therefore, move into our target margin range predominantly through our own improvement actions, which gives us confidence in our financial framework. Of course, if end markets recover faster, the work we have done to reduce our manufacturing cost base over the last 3 years, coupled with our planned optimization opportunities, gives us the opportunity to accelerate that margin improvement via a healthy drop-through.

Taking the consensus expectation for the second half of 2025 of 9% as the starting point, there are 3 drivers of a return to 12% that deliver in approximately equal proportions and which mainly require us to execute action plans that are in our own control. We will firstly build on our track record of continuous improvement, which has, on average, generated net savings of at least GBP 10 million per annum by delivering more substantial benefits from our transformation of supply chain and procurement.

As you can see from Damien's presentation, we do have a lot to go for. We will also, in this period, start to benefit from our investment in digitalization and back-office transformation. Secondly, having nearly completed our rationalization of manufacturing sites for the time being, we will focus on turnaround plans for a number of sites where performance is suboptimal and where there is the opportunity for margin enhancement once performance has been improved. Thirdly, we do anticipate some benefit of sales growth. This will partly be from an element of market recovery, but Damien has also spoken of the opportunity to grow in focus areas where we have a strong right to win.

So growth in the near term will be as much about good execution as about market recovery. Beyond 2028, operational effectiveness will drive further margin expansion with the benefits of digitalization and back-office transformation accelerating through improved planning, forecasting, customer service and transactional efficiency. Then we expect continued growth in the focus areas that we have described, which will be margin accretive.

Finally, Damien has referred to the growth opportunity from proactively managing our business portfolio. This will involve much more precise capital allocation to accelerate organic growth, along with partnerships and bolt-on M&A. And whereas any time we find we have businesses that don't meet the requirements of our financial framework, we will not hesitate to divest them as we did with MMS.

In terms of margin impact, we anticipate the need for some benefit from this activity to get us to 14%. But given the growth potential and accretive margins in a number of our end markets, there is the potential over time for margin to progress even further.

Moving on to capital allocation. We are fully aware that the decline in our EBITDA, combined with the need to complete our investment in semiconductor capacity, albeit cut back, has resulted in our leverage moving above our target range. We are focused on correcting that, and we'll bring leverage to around 1.5x over the next 2 years.

Our target leverage, therefore, remains in the 1 to 1.5x range in relation to ongoing operations. And as before, we would consider increasing this in due course into the 1.5 to 2x range in the event of a compelling acquisition. Whilst organic capital investment remains a priority in support of organic growth opportunities, we foresee limited needs for capacity investment and expect to be able to maintain overall CapEx at around 1.2x depreciation.

We will maintain the dividend for now, then grow it in line with adjusted earnings once cover returns to around 2.5x. However, in the very short term, we will prioritize stabilization of the balance sheet as we go through the current downturn as well as our organic investment and we'll pause our buyback following completion of the current tranche.

Once stabilized, we will consider the need to fund inorganic investment alongside additional returns to shareholders. The Board will review this situation regularly, recognizing the opportunity that additional returns present to return cash to shareholders and enhance earnings. The outcome of these measures can be seen in our cash flow forecast.

On the left-hand side of the chart, you can see the forecast for the next 2 years, reflecting our short-term focus on stabilizing the balance sheet. We have allowed for a modest increase in EBITDA in line with analyst consensus over the next 2 years. We're also allowing for GBP 45 million of receipts from the sale of our shares in Foseco India, mainly during 2026. As well as reducing our capital expenditure, we're coming to the end of our restructuring program, allowing exceptional costs also to wind down in 2026.

We are investing in a digital transformation, firstly, in the form of our ERP, whilst also embracing new data analytics and data management capabilities that are enabling better decision-making and business management. We expect that to continue at around GBP 20 million per annum until the second half of 2027 when we will have completed our ERP program. We will keep dividends stable and pause the buyback.

Taken together, these measures give the opportunity for leverage to come down steadily as EBITDA improves. Then once we've achieved that steady state, we anticipate achieving a good level of free cash flow conversion at around 65%, giving the opportunity for meaningful further investment and/or returns to shareholders.

As noted, we expect our capital expenditure to stabilize at around GBP 50 million to GBP 55 million a year or 1.2x depreciation, having completed our investment in semiconductor capacity. This will allow for investment of around GBP 28 million in new capacity in line for our strategy over the next 3 years, focused on those opportunities where growth is already evident and where we have a strong right to win.

We would then expect maintenance CapEx to remain at around 1x current depreciation. It is worth noting that this does reflect one benefit of having closed 26 factories between 2016 and 2025, and that our need for maintenance capital has diminished over time, leaving scope for future investment in capacity should growth require it.

Finally, I will sum up with our updated financial framework. Damien has spoken of the strategic mandates for our segments with Technical Ceramics and Performance Carbon expected to grow ahead of GDP, whilst Thermal Ceramics will be slightly below. Overall, we expect our growth over the next few years to amount to some 1 to 2 percentage points ahead of GDP.

Our margin target is to achieve 12% to 14%. This is largely based on transformational measures we can undertake ourselves with a cautious element of market recovery also assumed. Our target for return on invested capital remains in the 17% to 20% range. Our target leverage range also remains the same. And once stabilized, we would aim to keep leverage in the 1 to 1.5x range in relation to ongoing operations and would consider increasing this into the 1.5 to 2x range in the event of an acquisition.

Our ambition then is to achieve sustained growth in adjusted EPS through above GDP organic revenue growth, a greater focus on self-help from operational excellence and portfolio optimization, then enhancing returns to shareholders as appropriate.

Thank you, and I'll hand back to Damien for concluding remarks.

Thank you, Richard. I'm going to conclude with our 4 key messages. We're setting a path to achieve 12% margins by 2028. We're focusing on our right to win to drive above GDP growth at higher margins. We're executing 3 distinctive mandates for each of our divisions, and we're maximizing portfolio value to sustain 12% to 14% margins further out. Thank you.