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
The documents are also available in
the 'Invest In Us' section of the Company's website at:
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).
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.
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Risk
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Risk description, assessment and trend from
2022
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Mitigation
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OPERATIONAL RISKS
TECHNICAL LEADERSHIP
Severity: Moderate
Trend: Unchanged
Risk appetite: Higher
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The Group's strategic success depends on maintaining
and developing its technical leadership in materials science over
its competitors.
Unforeseen or unmitigated technology obsolescence, the
emergence of competing technologies, the loss of control of
proprietary technology or the loss of intellectual
property/know-how would impact the Group's business and its ability
to deliver on its strategic goals.
The advanced technological nature of the Group
requires people with highly differentiated skillsets. Any inability
to recruit, retain and develop the right people would negatively
impact the Group's ability to achieve its strategic goals.
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The Group has a dedicated technology team within each
GBU which monitors 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 Centres focus
Morgan Advanced Materials' expertise and research resources on
further developing core technologies and identifying new
opportunities and applications.
The GBU leadership teams proactively monitor their
technology priorities and R&D investments and have implemented
a stage-gate process to manage this effectively. These projects are
also regularly reviewed by the CEO and CFO.
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.
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OPERATIONAL RISKS
OPERATIONAL EXECUTION/
ORGANISATIONAL CHANGE
Severity: Moderate
Trend: Unchanged
Risk appetite: Moderate
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As part of the Group's strategy to improve the
efficiency of its operations and organisation, various changes have
been made to operational processes at individual sites, to the GBU
set up and to the Group's structure. Further improvements
and changes are planned for future years. Failure to manage these
changes adequately could result in interruption to operations or
customer service, or a failure to maximise the Group's
opportunities.
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Changes to operational processes are carefully
considered by site and GBU management before implementation.
Operational improvements and savings are monitored against budget
by the GBUs and the Executive Committee to ensure that changes
deliver the savings promised without disruption to business
operations. New capital investments are approved at appropriate
levels of the Group and delivery of these is overseen by GBU and
Group management.
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.
From 1 January 2024, Electrical Carbon and Seals and
Bearings GBUs were consolidated into a new GBU: Performance Carbon,
to take advantage of 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.
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OPERATIONAL RISKS
PORTFOLIO MANAGEMENT
Severity: Low
Trend: Unchanged
Risk appetite: Moderate
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The Group operates across a range of product and
technology families. These 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 could lead to the value of the Group's businesses being
eroded over time or to a failure to exploit opportunities to
acquire businesses with the capability to add further value to the
Group.
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The Board performs regular reviews of the Group's
portfolio.
Following the cyber security incident in January 2023,
the Group launched a restructuring and efficiency programme. This
aims to simplify the Group's portfolio and align capacity with the
anticipated demand across the business. This programme will
continue into 2024.
During 2023, opportunities to acquire businesses were
actively reviewed on a continuing basis.
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OPERATIONAL RISKS
MACRO-ECONOMIC AND POLITICAL ENVIRONMENT
Severity: Significant
Trend: Unchanged
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The Group operates in a range of markets and
geographies around the world and could be affected by political,
economic, social or regulatory developments or instability, for
example an economic slowdown or issues stemming from oil and
natural resource price shocks.
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The Group's broad market and geographic spread helps
to mitigate the effects of political and economic changes.
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 to regular review by the
Executive Committee and the Board.
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.
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OPERATIONAL RISKS
ENVIRONMENT, HEALTH AND SAFETY (EHS)
Severity: High
Trend: Unchanged
Risk appetite: Very low
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The Group operates a number of manufacturing
facilities around the world. A failure in the Group's EHS
procedures could lead to environmental damage or to injury or death
of employees or third parties, with a consequential impact on
operations and increased risk of regulatory or legal action being
taken 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 Group may
have obligations relating to prior asset sales or closed
facilities.
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Managing its operations safely is the Group's number
one priority. The Group has a comprehensive EHS programme
managed by the Group Environment, Health, Safety and Sustainability
Director, with clear EHS standards and a comprehensive programme of
audits to assess compliance.
The Executive Committee approves annual priorities for
EHS.. These form the basis for individual sites' own EHS priorities
and plans and complement the Group's 'thinkSAFE' behavioural safety
programme.
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 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.
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OPERATIONAL RISKS
PANDEMIC
Severity: High
Trend: Unchanged
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The overall risk severity remains high as the impact
of a future pandemic could be significant.
Communicable disease impacts ways of working, the
supply chain and the ability of employees to travel to work in
affected areas.
The Company's priority is to take all actions
and precautions necessary to ensure the safety and wellbeing
of our employees.
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In all manufacturing sites, ways of working
to respond to the COVID-19 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 do
so.
These measures can be swiftly replicated in the event
of another pandemic.
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OPERATIONAL RISKS
CLIMATE CHANGE
Severity: High
Trend: Unchanged
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Global climate change poses a number of short-term and
longer-term challenges for our business. The expected changes are
far-reaching and irreversible.
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The Group actively mitigates the two transitional
risks of carbon pricing and eliminating natural gas.
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.
Longer-term risks include heat stress, water scarcity,
sea level rise, and supply chain disruption. Adverse and extreme
weather changes are also a 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.
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OPERATIONAL RISKS
PRODUCT QUALITY, SAFETY AND LIABILITY
Severity: High
Trend: Unchanged
Risk appetite: Low
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Products used in applications for which they were not
intended or inadequate quality control/over-commitment on customer
specifications could result in products not meeting customer
requirements, which could in turn lead to significant
liabilities and reputational damage.
Some of our products are used in potentially high-risk
applications, for example in the aerospace, automotive, electric
vehicle, medical and power industries.
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Many of the Group's products are designed to customer
specifications. Morgan Advanced Materials' quality management
systems and training help ensure that all our products meet or
exceed customer requirements and national/international
standards.
The Group Legal Policy requires that contracts
relating to products used in potential high-risk applications are
subject to legal review to ensure that appropriate protections are
in place for product quality risks. Group-wide training on the
policy requirements continues.
The Group insurance programme includes product
liability insurance and is reviewed annually by the Board.
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OPERATIONAL RISKS
IT, CYBERSECURITY AND DATA MANAGEMENT
Severity: Significant
Trend: Unchanged
Risk appetite: Very low
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Across the industry the frequency of cyber security
incidents is growing, influenced by increased connectivity, an
accelerated shift to cloud platforms and remote working.
The global regulatory compliance landscape including
export regulations, continues to mature and add complexity to how
we process, store and share internal and external data on a global
level within the Group. Failure adds significant risk to the GBUs
and the Company.
The effective management of the Group's IT
infrastructure is important in enabling our businesses to deliver
customer requirements reliably. Key business system failure might
impact the ability of the business to deliver on its strategic
goals.
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Following the cyber security incident experienced in
January 2023, the Group's security and monitoring programme has
been expedited. We continue to run training programmes on cyber
risk and IT security and have strengthened the 'thinkSECURE'
internal brand as an awareness programme.
We continue to monitor the changing regulatory and
compliance landscape and the impact of emerging regulations, such
as the US Department of Defense's Cybersecurity Maturity Model
Certificate (CMMC), and the EU-GDPR and UK Data Protection Act
(DPA) 2018.
The Data Governance Committee was set up during 2023,
alongside a data classification project which is focused on
identifying, monitoring and protecting the use of data across the
Group.
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OPERATIONAL RISKS
SUPPLY CHAIN/BUSINESS CONTINUITY
Severity: High
Trend: Unchanged
Risk appetite: Higher
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The Group has potential single-point exposure risks,
which include:
· Single-point supplier
- a significant interruption of a key internal or external supply
could impact business continuity
· Single-point site -
a key site exposed to a strike, a natural catastrophe or a
serious incident, such as fire, could impact business
continuity.
One Group site, Hayward, is situated in the
California, US earthquake zone. Certain sites of the Group's
businesses are important for intercompany supply purposes.
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The Group has a diversified manufacturing, customer
and geographic base which provides a level of resilience against
single-point exposures. Were any site to be unavailable, production
in many cases could be switched to other sites. The Business
Continuity Policy supports minimum standards at the Group's most
important sites for intercompany supply.
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 maintenance of product
quality and strong customer relationships.
The overall risk severity has improved based on a
reduced probability 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.
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FINANCIAL RISKS
TREASURY
Severity: Moderate
Trend: Unchanged
Risk appetite: Low
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The Group's global reach means that it is exposed to
uncertainties in the financial markets, the fiscal jurisdictions
where it operates, and the banking sector. These heighten the
Group's funding, foreign exchange, tax, interest rate, credit and
liquidity risks as well as the risk that a bank failure could
impact the Group's cash.
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The Group's treasury function operates on a
risk-averse basis. Required controls over selection of banks, cash
management and other treasury practices and payments globally are
documented in our Treasury Policy and related procedures. The Group
treasury team manages the Group's funding, liquidity, cash
management, interest rate, foreign exchange, counterparty credit
and other treasury-related risks. Treasury matters are regularly
reviewed by the Board and Audit Committee.
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 December 2023, £42.1 million of the
Group's £230 million revolving credit facility was drawn down.
Further detail on the Company's Treasury Policy is set
out in the Group financial review, which can be found on page
68.
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FINANCIAL RISKS
PENSION
FUNDING
Severity: Low
Trend: Favourable
Risk appetite: Low
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The Group sponsors several defined benefit pension
arrangements ('the Schemes'), which are largely fully funded and
with an investment strategy that aims to insulate them from
fluctuating interest rates, investment values and inflation.
The deficit in Morgan Advanced Materials' global
defined benefit pension schemes calculated on the basis
required for IAS 19 accounting disclosures increased from £15.6
million as at 31 December 2022 to £25.2 million as at
31 December 2023, principally as a result of a reduction in
the UK Schemes' surplus, measured on the accounting basis. Both UK
Schemes remain over 100% funded on the valuation basis, on which
future contribution requirements would be assessed.
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Our primary means of mitigating pensions funding risk
is proactive management of the pension scheme assets and
liabilities through an integrated pension strategy focusing on
funding, investment and benefit risk.
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 the total contributions
remaining due under the existing Recovery Plans and sufficient to
fully fund the Schemes on the basis of the Trustees' prudent 'Long
Term Objective'. In addition, the Schemes' interest and inflation
rate exposure is now 100% hedged using only moderate levels of
leverage. As a result, overall levels of risk in the Schemes have
been significantly reduced and the security of member benefits
greatly enhanced. No further contributions will be required from
the Company at least until the next Scheme Valuations in March
2025.
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.
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FINANCIAL RISKS
TAX
Severity: Moderate
Trend: Unchanged
Risk appetite: Low
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The Group operates in many jurisdictions around the
world and could be affected by changes in tax laws and regulations
within the complex international tax environment.
The OECD's Base Erosion and Profit Shifting (BEPS)
framework is generating additional obligations and filing
requirements for the Group as countries continue to implement
the actions in the framework. These could have an impact on
the tax paid by the Group.
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The Group's tax function, working in conjunction with
external specialists as required, closely monitors fiscal
developments and changes such as BEPS to ensure that the Group's
tax arrangements and practices continue to comply with the
requirements of all relevant jurisdictions, whilst also enabling
efficient management of the tax liability. The Group's Head of Tax
reports to the Audit Committee on key tax issues and
initiatives.
The Group has published its tax strategy on its
website in line with UK corporate governance requirements:
morganadvancedmaterials.com/ESGPolicies.
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LEGAL AND
COMPLIANCE RISKS
CONTRACT MANAGEMENT
Severity: High
Trend: Unchanged
Risk appetite: Low
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As a global advanced materials business, supplying
components into critical applications, the Group may be exposed to
liabilities arising from the use of its products. Ineffective
contract risk management could result in significant liabilities
for the Group and could damage customer relationships.
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The Group has an in-house legal function supplemented
by specialist external lawyers.
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 unlimited
liability contracts or contracts where the liability cap
exceeds
£5 million.
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.
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LEGAL AND
COMPLIANCE RISKS
COMPLIANCE
Severity: High
Trend: Unchanged
Risk appetite: Very low
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The Group's global operations must comply with a range
of national and international laws and regulations including those
related to bribery and corruption, human rights, trade/export
compliance and competition/anti-trust activities.
A failure to comply with any applicable
laws/regulations could result in civil or criminal liabilities
and/or individual or corporate fines and could also result in
debarment from government-related contracts or rejection by
financial market counterparties and reputational damage.
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The Group is committed to the highest standards of
corporate and individual behaviour. To support this, in 2018 the
Group issued the Morgan Code, which has been continuously in force
since then. The Code defines the Group's approach to doing business
ethically and confirms our commitment to high standards
of ethical behaviour. The Code is supported by a range of
documents and mechanisms: global Group policies, standards and
guidance; training materials; the provision of an ethics
'Speak Up' hotline for employees; and systems to support effective
screening of and due diligence on third parties.
Mandatory ethics training for staff covers topics
including anti-bribery and anti-corruption, anti-trust, harassment
and bullying and trade controls. The Group's 'Speak Up' methods
enable staff to report concerns anonymously.
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.
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For further information, please
contact:
Win Chime
Company Secretary
Company.Secretariat@morganplc.com