REG - Morgan Adv.Materials - Annual Financial Report
05/04/2024 13:00
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RNS Number : 5396J Morgan Advanced Materials PLC 05 April 2024
5 April 2024
Morgan Advanced Materials plc
(the Company)
Publication of 2023 Annual Report and Notice of 2024 Annual General Meeting
The following documents have today been posted or otherwise made available to
shareholders:
· Annual Report and Financial Statements for the year ended 31 December
2023 (2023 Annual Report);
· Notice of the 2024 Annual General Meeting (2024 AGM) to be held at
the offices of Slaughter and May, One Bunhill Row, London, EC1Y 8YY, on
Thursday 9 May 2024 at 10.30am; and
· Form of Proxy for the 2024 AGM.
In accordance with Listing Rule 9.6.1, a copy of each of these documents has
been uploaded to the National Storage Mechanism and will be available for
viewing shortly at: https://data.fca.org.uk/#/nsm/nationalstoragemechanism
(https://data.fca.org.uk/#/nsm/nationalstoragemechanism)
The documents are also available in the 'Invest In Us' section of the
Company's website at:
www.morganadvancedmaterials.com (http://www.morganadvancedmaterials.com/)
/2024AGM.
Information required by Disclosure Guidance and Transparency Rule 6.3.5
The Company's full year results announcement of 12 March 2024 contained a
management report, audited financial statements which were prepared in
accordance with the applicable accounting standards as well as responsibility
statements. The financial information set out in the results announcement
does not constitute the Company's statutory accounts for the year ended 31
December 2023. Statutory accounts for 2023 are included in the 2023 Annual
Report, which will be delivered to the registrar of companies following the
2024 AGM. The auditors have reported on those accounts; their report was (i)
unqualified, (ii) did not include a reference to any matters to which the
auditors drew attention by way of emphasis without qualifying their report and
(iii) did not contain a statement under section 498(2) or (3) of the Companies
Act 2006 in respect of the accounts for 2023.
The information below, which is extracted from the 2023 Annual Report, is
included solely for the purpose of complying with DTR 6.3.5. This
information should be read in conjunction with the Company's results
announcement (available at www.morganadvancedmaterials.com
(http://www.morganadvancedmaterials.com) ). This announcement is not a
substitute for reading the full 2023 Annual Report. All page numbers and
cross-references in the extracted information below refer to page numbers in
the 2023 Annual Report.
Risk Management
We have an established risk management methodology which seeks to identify,
prioritise and mitigate risks, underpinned by a 'three lines of defence'
model comprising an internal control framework, internal monitoring and
independent assurance processes.
The Board considers that risk management and internal control are fundamental
to achieving the Group aim of delivering long-term sustainable growth in
shareholder value.
Principal and emerging risks are identified both 'top down' by the Board and
the Executive Committee and 'bottom up' through the GBUs. The severity of
each risk is quantified by assessing its inherent impact and mitigated
probability, to ensure that the residual risk exposure is understood and
prioritised for control throughout the Group.
Senior executives are responsible for the strategic management of the Group's
principal and emerging risks, including related policy, guidelines and
processes, subject to Board oversight.
During the year, a number of actions were identified to continue to improve
internal controls and the management of risk, including:
· Maintaining significant focus on employee safety and wellbeing, we have:
refreshed our 'take 5 for safety' process, improved the safety of our
high-temperature processes and deployed a new EHS system to facilitate the
reporting and management of EHS activities
· strengthening our security posture, following the cyber security incident
which we experienced in January 2023, and accelerating our IT infrastructure
modernisation programme
· increased focus on a robust internal financial control environment
· continued focus on the ethics agenda, including self-certification of
policy compliance and mandatory quarterly training on ethics and compliance
· driving forward the Group's sustainability agenda, we have a broad- based
improvement programme underway covering energy procurement, process
improvements and behavioural changes in our plants.
Risk Appetite
The Board has reviewed its appetite for the Group's principal risks and
concluded that its appetite for these risks remains unchanged from the
previous year.
The Group is willing to take considered risks to develop new technologies,
applications, partnerships and markets for its products and to meet customer
needs.
The Group strives to eliminate risks to product quality and health and safety,
as these underpin the success of the Company's products and the safety of
our people and contractors.
The appetite for risk in the areas of legal and regulatory compliance
continues to be extremely low, and the Group expects its businesses to comply
with all laws and regulations in the countries in which they operate. The
Group also has a low appetite for financial risk.
During the year, the Board monitored the Group's current risk exposure
relative to the Board's appetite for different risks. There were no risks
where the current risk exposure exceeded the Board's risk appetite.
Emerging risks
As part of the ongoing risk management process, the Board and the GBUs
identified and assessed emerging risks. None of these emerging risks are
currently deemed to be significant and they are therefore not listed amongst
the Group's principal risks below. They are identified, assessed and monitored
continuously to be able to respond effectively when they crystallise.
The key emerging risk areas identified were:
· Regulatory risk: manufacturing regulations - regulatory requirements for
certain hazardous materials. Tax regulations - with governments globally
aiming to reduce their national debts following the COVID-19 pandemic
· Social/Societal: potential recruitment challenges to replace an ageing
direct workforce in some locations; longer-term changes to new end-markets,
such as electric vehicles, domestic heating and decentralised generation of
energy
· Business model: route to market - potential permanent change in
traditional selling models requiring an accelerated shift to e-commerce.
Change to permanent remote working with our employees, customers and vendors.
These emerging risks are monitored so that their potential impact can be
understood and mitigated to prevent them from becoming more significant. They
are also considered as an integral part of the strategic planning process, and
they form part of the focused risk review of each GBU.
The following are the Group's principal risks and uncertainties and they
represent the risks that the Board feels could have the most significant
impact on achieving the Group's strategy of building a sustainable business
for the long term, and could impact the delivery of strong returns to the
Group's shareholders.
An indication of the Board's assessment of the trend of each principal risk -
whether the potential severity has increased, decreased or is broadly
unchanged over the past year - is provided.
Risk Risk description, assessment and trend from 2022 Mitigation
OPERATIONAL RISKS The Group's strategic success depends on maintaining and developing its The Group has a dedicated technology team within each GBU which monitors
technical leadership in materials science over its competitors. relevant technology and business developments, using technology roadmaps
linked to 20 major technology families, to ensure it remains at the leading
edge of development. The Group also has four Centres of Excellence. These
TECHNICAL LEADERSHIP
Centres focus Morgan Advanced Materials' expertise and research resources on
Unforeseen or unmitigated technology obsolescence, the emergence of competing further developing core technologies and identifying new opportunities and
technologies, the loss of control of proprietary technology or the loss of applications.
intellectual property/know-how would impact the Group's business and its
Severity: Moderate ability to deliver on its strategic goals.
The GBU leadership teams proactively monitor their technology priorities and
R&D investments and have implemented a stage-gate process to manage this
Trend: Unchanged The advanced technological nature of the Group requires people with highly effectively. These projects are also regularly reviewed by the CEO and CFO.
differentiated skillsets. Any inability to recruit, retain and develop the
right people would negatively impact the Group's ability to achieve its
strategic goals.
Risk appetite: Higher
Where Group products are designed for a specific customer, they are developed
in partnership with the customer. The Group seeks to secure intellectual
property protection, where appropriate via a Trade Secret standard, for its
existing and emerging portfolio of products and has an in-house counsel
dedicated to intellectual property protection, with the support of external
advisors.
The GBU IP Strategies place emphasis on improving trade secret management
activities. Group policy includes a Trade Secret Standard document.
OPERATIONAL RISKS As part of the Group's strategy to improve the efficiency of its operations Changes to operational processes are carefully considered by site and GBU
and organisation, various changes have been made to operational processes at management before implementation. Operational improvements and savings are
individual sites, to the GBU set up and to the Group's structure. Further monitored against budget by the GBUs and the Executive Committee to ensure
improvements and changes are planned for future years. Failure to manage these that changes deliver the savings promised without disruption to business
OPERATIONAL EXECUTION/ changes adequately could result in interruption to operations or customer operations. New capital investments are approved at appropriate levels of the
ORGANISATIONAL CHANGE service, or a failure to maximise the Group's opportunities. Group and delivery of these is overseen by GBU and Group management.
Severity: Moderate Organisational changes are assessed by the Chief Executive Officer,
the Executive Committee and in certain cases by the Board before being
implemented in line with local employment regulations.
Trend: Unchanged
From 1 January 2024, Electrical Carbon and Seals and Bearings GBUs were
consolidated into a new GBU: Performance Carbon, to take advantage of
Risk appetite: Moderate potential synergies. Change management capabilities have been developed to
mitigate the associated integration risk.
Further detail on our strategy can be found on pages 18 to 19 and 23 to 25.
OPERATIONAL RISKS The Group operates across a range of product and technology families. These The Board performs regular reviews of the Group's portfolio.
are subject to long-term market trends which may lead to either obsolescence
or opportunities to further expand the Group. Failure to manage the Group's
portfolio of businesses proactively and in line with this technology profile
PORTFOLIO MANAGEMENT could lead to the value of the Group's businesses being eroded over time or to Following the cyber security incident in January 2023, the Group launched a
a failure to exploit opportunities to acquire businesses with the capability restructuring and efficiency programme. This aims to simplify the Group's
to add further value to the Group. portfolio and align capacity with the anticipated demand across the business.
This programme will continue into 2024.
Severity: Low
During 2023, opportunities to acquire businesses were actively reviewed on a
Trend: Unchanged continuing basis.
Risk appetite: Moderate
OPERATIONAL RISKS The Group operates in a range of markets and geographies around the world and The Group's broad market and geographic spread helps to mitigate the effects
could be affected by political, economic, social or regulatory developments or of political and economic changes.
instability, for example an economic slowdown or issues stemming from oil and
natural resource price shocks.
MACRO-ECONOMIC AND POLITICAL ENVIRONMENT
Annual budgets and strategic plans, as well as monthly forecasts for our
different businesses are used to monitor delivery against expectations and
anticipate potential external risks to performance. These are subject
Severity: Significant to regular review by the Executive Committee and the Board.
Trend: Unchanged In 2023, the macro-economic and political environment remains muted, driven by
high energy costs and the various global conflicts.
The Board continues to monitor the global issues which impact the Group,
including trade restrictions and sanctions and the relationship between the US
and China.
OPERATIONAL RISKS The Group operates a number of manufacturing facilities around the world. A Managing its operations safely is the Group's number one priority. The Group
failure in the Group's EHS procedures could lead to environmental damage or to has a comprehensive EHS programme managed by the Group Environment, Health,
injury or death of employees or third parties, with a consequential impact on Safety and Sustainability Director, with clear EHS standards and a
operations and increased risk of regulatory or legal action being taken comprehensive programme of audits to assess compliance.
ENVIRONMENT, HEALTH AND SAFETY (EHS) against the Group. Any such action could result in both financial damages and
damage to reputation. Given the long history of many of the operations of the
Group, there is also a risk that historical operating and environmental
standards may not have met today's environmental regulations. In addition, The Executive Committee approves annual priorities for EHS.. These form the
Severity: High the Group may have obligations relating to prior asset sales or closed basis for individual sites' own EHS priorities and plans and complement the
facilities. Group's 'thinkSAFE' behavioural safety programme.
Trend: Unchanged
EHS performance is monitored by the Group Executive Committee and the Board.
Our LTA rate was 0.19 (2022: 0.28); with the improvement reflecting the
significant focus on employee safety and wellbeing. During 2023, we refreshed
Risk appetite: Very low our 'take 5 for safety' process, improved the safety of our high-temperature
processes and deployed a new EHS system to facilitate the reporting and
management of EHS activities. Safety continues to receive a high level of
focus throughout the organisation.
The Group continues to manage projects to remediate legacy contamination at a
number of former operational sites in conjunction with external specialists
and relevant authorities.
The Group's commitment to protecting and enhancing the environment is set out
on pages 35 to 38.
TCFD disclosures are set out on pages 44 to 53.
Details of the Group's provisions and contingent liabilities can be found in
note 24 to the consolidated financial statements.
OPERATIONAL RISKS The overall risk severity remains high as the impact of a future pandemic In all manufacturing sites, ways of working to respond to the COVID-19
could be significant. pandemic were successfully adapted - including social distancing, hygiene
measures and additional PPE - to keep our people safe. Flexible working from
home was also established, and further strengthened for all roles that could
PANDEMIC
do so.
Communicable disease impacts ways of working, the supply chain and the ability
of employees to travel to work in affected areas.
Severity: High These measures can be swiftly replicated in the event of another pandemic.
The Company's priority is to take all actions and precautions necessary to
ensure the safety and wellbeing of our employees.
Trend: Unchanged
OPERATIONAL RISKS Global climate change poses a number of short-term and longer-term challenges The Group actively mitigates the two transitional risks of carbon pricing and
for our business. The expected changes are far-reaching and irreversible. eliminating natural gas.
CLIMATE CHANGE
The Group has completed scenario analysis for all identified risks and is in
the process of developing its strategy. See further details on pages 46 to 48.
Severity: High
Longer-term risks include heat stress, water scarcity, sea level rise, and
supply chain disruption. Adverse and extreme weather changes are also a
Trend: Unchanged potential risk which is monitored by the GBUs and the respective sites.
Science based targets have been validated by SBTi and are in line with a well
below 2°C scenario.
OPERATIONAL RISKS Products used in applications for which they were not intended or inadequate Many of the Group's products are designed to customer specifications. Morgan
quality control/over-commitment on customer specifications could result in Advanced Materials' quality management systems and training help ensure that
products not meeting customer requirements, which could in turn lead to all our products meet or exceed customer requirements and
significant liabilities and reputational damage. national/international standards.
PRODUCT QUALITY, SAFETY AND LIABILITY
Some of our products are used in potentially high-risk applications, for The Group Legal Policy requires that contracts relating to products used in
Severity: High example in the aerospace, automotive, electric vehicle, medical and power potential high-risk applications are subject to legal review to ensure that
industries. appropriate protections are in place for product quality risks. Group-wide
training on the policy requirements continues.
Trend: Unchanged
The Group insurance programme includes product liability insurance and is
reviewed annually by the Board.
Risk appetite: Low
OPERATIONAL RISKS Across the industry the frequency of cyber security incidents is growing, Following the cyber security incident experienced in January 2023, the Group's
influenced by increased connectivity, an accelerated shift to cloud platforms security and monitoring programme has been expedited. We continue to run
and remote working. training programmes on cyber risk and IT security and have strengthened the
'thinkSECURE' internal brand as an awareness programme.
IT, CYBERSECURITY AND DATA MANAGEMENT
The global regulatory compliance landscape including export regulations,
continues to mature and add complexity to how we process, store and share We continue to monitor the changing regulatory and compliance landscape and
Severity: Significant internal and external data on a global level within the Group. Failure adds the impact of emerging regulations, such as the US Department of Defense's
significant risk to the GBUs and the Company. Cybersecurity Maturity Model Certificate (CMMC), and the EU-GDPR and UK Data
Protection Act (DPA) 2018.
Trend: Unchanged
The effective management of the Group's IT infrastructure is important in
enabling our businesses to deliver customer requirements reliably. Key The Data Governance Committee was set up during 2023, alongside a data
business system failure might impact the ability of the business to deliver on classification project which is focused on identifying, monitoring and
Risk appetite: Very low its strategic goals. protecting the use of data across the Group.
OPERATIONAL RISKS The Group has potential single-point exposure risks, which include: The Group has a diversified manufacturing, customer and geographic base which
provides a level of resilience against single-point exposures. Were any site
· Single-point supplier - a significant interruption of a key internal or to be unavailable, production in many cases could be switched to other sites.
external supply could impact business continuity The Business Continuity Policy supports minimum standards at the Group's most
SUPPLY CHAIN/BUSINESS CONTINUITY
important sites for intercompany supply.
· Single-point site - a key site exposed to a strike, a natural
catastrophe or a serious incident, such as fire, could impact business
continuity.
Severity: High
Management of these risks also involves monitoring and reviewing supply chains
(internal and external), dual/multiple sourcing of materials or strategic
stock, site security and safety mechanisms, business continuity plans, and
One Group site, Hayward, is situated in the California, US earthquake zone. maintenance of product quality and strong customer relationships.
Trend: Unchanged Certain sites of the Group's businesses are important for intercompany supply
purposes.
The overall risk severity has improved based on a reduced probability
Risk appetite: Higher resulting from the effects of the ongoing GBU activities.
The Group insurance programme includes business interruption cover and
specific cover in relation to the impact of an earthquake in California, US;
this Group-level insurance is reviewed annually by the Board.
FINANCIAL RISKS The Group's global reach means that it is exposed to uncertainties in the The Group's treasury function operates on a risk-averse basis. Required
financial markets, the fiscal jurisdictions where it operates, and controls over selection of banks, cash management and other treasury practices
the banking sector. These heighten the Group's funding, foreign exchange, and payments globally are documented in our Treasury Policy and related
tax, interest rate, credit and liquidity risks as well as the risk that procedures. The Group treasury team manages the Group's funding, liquidity,
TREASURY a bank failure could impact the Group's cash. cash management, interest rate, foreign exchange, counterparty credit and
other treasury-related risks. Treasury matters are regularly reviewed by the
Board and Audit Committee.
Severity: Moderate
The refinance of the Group's revolving credit facility (RCF) was completed in
November 2022. No material debt maturities are due until 2026. As at 31
Trend: Unchanged December 2023, £42.1 million of the Group's £230 million revolving credit
facility was drawn down.
Risk appetite: Low
Further detail on the Company's Treasury Policy is set out in the Group
financial review, which can be found on page 68.
FINANCIAL RISKS The Group sponsors several defined benefit pension arrangements ('the Our primary means of mitigating pensions funding risk is proactive management
Schemes'), which are largely fully funded and with an investment strategy that of the pension scheme assets and liabilities through an integrated pension
aims to insulate them from fluctuating interest rates, investment values and strategy focusing on funding, investment and benefit risk.
inflation.
PENSION
FUNDING
In the UK, both Schemes are closed to the future accrual of benefits.
Following the most recent Scheme valuations in March 2022, the Company agreed
to make a lump sum contribution of £67 million to the Schemes, equivalent to
Severity: Low The deficit in Morgan Advanced Materials' global defined benefit pension the total contributions remaining due under the existing Recovery Plans and
schemes calculated on the basis required for IAS 19 accounting disclosures sufficient to fully fund the Schemes on the basis of the Trustees' prudent
increased from £15.6 million as at 31 December 2022 to £25.2 million as at 'Long Term Objective'. In addition, the Schemes' interest and inflation rate
31 December 2023, principally as a result of a reduction in the UK Schemes' exposure is now 100% hedged using only moderate levels of leverage. As a
Trend: Favourable surplus, measured on the accounting basis. Both UK Schemes remain over 100% result, overall levels of risk in the Schemes have been significantly reduced
funded on the valuation basis, on which future contribution requirements would and the security of member benefits greatly enhanced. No further contributions
be assessed. will be required from the Company at least until the next Scheme Valuations in
March 2025.
Risk appetite: Low
Risk for the one remaining defined benefit pension plan in the US has been
reduced. Following a $36 million additional contribution (in December 2017)
and a move to a significantly de-risked investment portfolio, this Scheme is
now almost fully funded on an accounting basis.
A liability management strategy for the remaining US multi-employer plan has
been agreed and a proposal for withdrawal made to the Trustees.
No significant funding obligations exist in any other individual country
although German legacy defined benefit schemes are unfunded, in accordance
with local practice. The recent risk review identified no significant
liability increases were likely in the foreseeable future.
FINANCIAL RISKS The Group operates in many jurisdictions around the world and could be The Group's tax function, working in conjunction with external specialists as
affected by changes in tax laws and regulations within the complex required, closely monitors fiscal developments and changes such as BEPS to
international tax environment. ensure that the Group's tax arrangements and practices continue to comply with
the requirements of all relevant jurisdictions, whilst also enabling efficient
TAX management of the tax liability. The Group's Head of Tax reports to the Audit
Committee on key tax issues and initiatives.
The OECD's Base Erosion and Profit Shifting (BEPS) framework is generating
additional obligations and filing requirements for the Group as countries
Severity: Moderate continue to implement the actions in the framework. These could have an
impact on the tax paid by the Group. The Group has published its tax strategy on its website in line with UK
corporate governance requirements:
Trend: Unchanged morganadvancedmaterials.com/ESGPolicies.
Risk appetite: Low
LEGAL AND As a global advanced materials business, supplying components into critical The Group has an in-house legal function supplemented by specialist external
COMPLIANCE RISKS applications, the Group may be exposed to liabilities arising from the use of lawyers.
its products. Ineffective contract risk management could result in significant
liabilities for the Group and could damage customer relationships.
CONTRACT MANAGEMENT The Group's legal policy requires in-house legal review of high-value
or high-liability contracts to ensure they contain appropriate protections
for the Group. The Policy requires Chief Executive Officer approval before a
business can enter into a high-value contract exceeding £2 million and
Severity: High unlimited liability contracts or contracts where the liability cap exceeds
£5 million.
Trend: Unchanged
The Group has product liability insurance that would respond to product
liability claims (up to policy limits) to the extent this is not limited
contractually.
Risk appetite: Low
LEGAL AND The Group's global operations must comply with a range of national and The Group is committed to the highest standards of corporate and individual
COMPLIANCE RISKS international laws and regulations including those related to bribery and behaviour. To support this, in 2018 the Group issued the Morgan Code, which
corruption, human rights, trade/export compliance and competition/anti-trust has been continuously in force since then. The Code defines the Group's
activities. approach to doing business ethically and confirms our commitment to high
standards of ethical behaviour. The Code is supported by a range of documents
COMPLIANCE and mechanisms: global Group policies, standards and guidance; training
materials; the provision of an ethics 'Speak Up' hotline for employees; and
A failure to comply with any applicable laws/regulations could result in civil systems to support effective screening of and due diligence on third parties.
or criminal liabilities and/or individual or corporate fines and could also
Severity: High result in debarment from government-related contracts or rejection by
financial market counterparties and reputational damage.
Mandatory ethics training for staff covers topics including anti-bribery and
anti-corruption, anti-trust, harassment and bullying and trade controls. The
Trend: Unchanged Group's 'Speak Up' methods enable staff to report concerns anonymously.
Risk appetite: Very low The Group has a Global Ethics and Compliance Director organising and leading
the Group's activities and programmes.
The Group also has a Global Trade Compliance Director whose role is dedicated
to ensuring compliance with trade controls. In 2022, the Company introduced
the 'thinkTRADE' programme including global training on export control.
In addition to Group-level compliance specialists, the businesses have
appointed compliance officers, who are responsible for supporting and
monitoring local training. Morgan Advanced Materials also employs
country-specific trade and export compliance specialists in higher-risk
businesses and jurisdictions.
Further details on ethics and compliance can be found on pages 33 to 43.
For further information, please contact:
Win Chime
Company Secretary
Company.Secretariat@morganplc.com
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