Morning or good afternoon all, and welcome to the Morgan Advanced Materials Half Year Results 2025. My name is Adam, and I'll be your operator for today. If you'd like to ask a question in the Q&A portion of today's call, you may do so by pressing Star, followed by one your telephone keypad to enter the queue. I'll now hand the floor to Damien Caby to begin. Damien, please go ahead when we're ready.
Thank you, Adam. Good morning, everyone. Welcome to our interim results call for the first half of 2025. I'm Damien Caby. I'm the Chief Executive of Morgan Advanced Materials. I was appointed CEO on the 1st of July from the position of President of our Thermal Products Global Business Unit, and I'm delighted to be presenting to you today. I'm joined by Richard Armitage, our CFO, for this call. I will start with a summary of the first half and the overall market environment. Richard will then take you through the financial position and the segmental drivers, and I will come back to share my initial thoughts and views and some of the opportunities that I can see for Morgan. I will then cover the outlook for the remainder of 2025. Before that, I would like to thank all my colleagues for their openness and support.
Having been in the company for more than 2.5 years, I already had a strong understanding of our operating model and of our empowering culture. I carried out an intense program of site visits and engagements in the second quarter, discussing strategies, our teams, and our customers. I've been impressed with the commitment to business performance, safety, and the openness for constructive challenge and the improvement mindset of our colleagues. Peter Raby not only leads a business which is in good financial shape and aligned with promising markets, but also a very powerful company culture. He and Richard, as well as all our colleagues, have been very supportive in this CEO transition. Let me move on now to the key points of the first half. As anticipated, we saw continued challenging conditions across most of the end markets we serve.
Our revenues were down 5.8% year- on- year at constant currency, in line with expectations. Versus H2 of 2024, this is flat. The expected further reduction of semiconductor sales was largely offset by increases in the core market. Despite the end market environment, we delivered resilient margins. The group adjusted operating margin was 11.1%, which is down 90 basis points year- on- year, but up 40 basis points versus H2 2024 on a constant currency basis. This was supported by pricing and continuous improvement, combined with the successful completion of the majority of parts of our current self-help program. In reaction to the tough market conditions in silicon carbide semiconductors, we have been proactive in managing our CapEx expenditure. The program is now substantially complete, with a total investment of £55 million against the previously announced reduction to £60 million.
Ramp-up of production is expected to start in 2026, and we have the ability to quickly expand capacity further when the market conditions improve. Our results announcement released earlier today provided our views on outlook. I will come back to that topic towards the end of the presentation. As a reminder, on the rationale around our simplification program, we are right-sizing the group's manufacturing footprint and capacity, and we are consolidating and optimizing our supply chain and building more manufacturing flexibility. The benefits from this program are materializing as planned. We expect to have reduced the site footprint to 60 by the end of 2025, versus 85 sites in 2016. This will deliver the full expected cost savings of £24 million in 2025 and £27 million in 2026 and beyond. We now have a leaner supply chain.
We are more agile to provide reliable delivery and quickly respond as markets recover. We will not stop there. We will continue to work on possible further areas of simplification and optimization, and I look forward to updating you on these in due course. Let's look now at our end market performance in more detail. This slide shows the year-on-year organic performance in our major market segments, split between our faster-growing segments and our core. Outside of health space, security, and defense, the majority of our markets remain challenging, particularly semiconductors. However, we have seen signs of stabilization in the first half. Semiconductor was down 35% versus the same period last year. This is a decline that we had expected at full-year results.
As previously noted, this is mostly driven by overstocking in the silicon carbide supply chain, which has only been partially offset by a progressive uptick in demand for silicon semiconductors. For context, semiconductor is a single-digit percentage of overall sales for the group, but it has double-digit structural growth rates, and it provides higher margins than the average of our portfolio. Healthcare is affected this year by the uncertainty in imaging and analytical end markets, which has been driving inventory adjustments and by changes in some customers' product mix. Security and defense has grown strongly at 11%. Aerospace continues to perform well and is offsetting the challenging conditions in automotive. Industrials and metals was down 5.7%, showing continuing market weakness as expected. Overall, sales in our core market have increased by 4% sequentially, and project activity shows early signs of improvement.
Whilst there are no clear trends in any specific market calling for a recovery, we are therefore seeing signs of stabilization. I will now hand you over to Richard to take you through the financial results, and I will return to talk about the opportunities we see ahead, the outlook, and our key takeaways.
Thank you, Damien, and good morning, everyone. I would like to start with an overview of the financial results for the half year to the 30th of June 2025. As expected, revenue at £522.6 million was 5.8% lower than prior year on an organic constant currency basis. This was caused by the decline in a number of our end markets that we saw during the second half of 2024, albeit that semiconductor is more challenged than expected, whilst clean energy and transportation, aerospace, petrochemical, and defense have all held up well.
Pricing was around 3%, reflecting a calmer inflationary environment, giving a volume decline of around 9%. Revenue in our faster-growing markets declined by 17.2% overall, with the main driver being semiconductor, which declined by 35%. Group adjusted operating profit was £58 million, a reduction of £13.3 million, giving an adjusted operating margin of 11.1%. Return on invested capital was 16.2%, slightly below our three-cycle range, but still delivering an attractive return. Free cash flow was an inflow of £1.2 million, which shows an improvement over last year as we work to improve our working capital. Adjusted earnings per share were 10.8 pence per share, and we have held the interim dividend flat at 5.4 pence. Specific adjusted items amounted to £16.3 million for the half year.
In the light of continued uncertainty in some of our end markets, we are not assuming any overall improvement in our revenue or profit performance in our second half compared with the first. Turning now to the profit bridge, we can firstly see a negative FX impact of £4.6 million in the first half, which is now likely to be £8.4 million for the full year. This reflects in particular the progressive weakening of the U.S. dollar versus sterling, with an average rate of $1.27 in the first half of last year compared to $1.30 this year. As you would expect, a 9% volume decline and associated overhead under recovery, combined with a mixed effect of semiconductor sales being weaker than expected, has had a significant impact on our profitability. The combined effect of lower volume and weaker mix is therefore £29 million, with approximately 50% due to each.
Pricing of around 3% has served to offset inflation of around 4% of cost of goods sold. We have continued our strong focus on self-help, with efficiency savings amounting to £11.4 million and savings from our simplification program amounting to £7.6 million as expected, both helping to mitigate the impact of the volume decline. At constant currency, the overall profit decline was limited to £8.7 million. Looking at the segments in more detail, we can see the impact of weaker industrial markets on Thermal Products. This segment has a relatively inflexible fixed cost base, so the impact of lower volumes drops straight through to adjusted operating profit and margin, albeit partly mitigated by simplification savings of around £2 million. Performance Carbon was impacted by lower volume and weaker mix, being the segment most affected by the weakness in semiconductor demand.
However, part of this was mitigated through simplification savings of around £4 million. Technical Ceramics demonstrated the benefit of its differentiated product portfolio, with weakness in semiconductor and healthcare offset by growth in aerospace, security, and defense, and clean energy. Around £1 million of simplification savings contributed, allowing the segment to achieve a small expansion in margin. Moving on to cash flow, I would firstly note working capital. This was an outflow of £4.7 million, but was much lower than the outflow seen in previous years due to actions taken to support working capital. Net capital expenditure amounted to £40.5 million, driven by investment in semiconductor capacity. This phase of investment is nearly complete, and expenditure is expected to tail off sharply in the second half. Cash flows relating to exceptional items totaled £15.3 million, reflecting our ongoing simplification program and investment in our ERP rollout.
For the full year, these are expected to be around £30 million. Free cash flow before dividends was therefore an inflow of £1.2 million. Net debt finished the half at £249.1 million, excluding these liabilities, in line with our expectations, but representing 1.7x EBITDA given the lower EBITDA. We expect to return this to within our framework range by the end of the year. Specific adjusting items comprise two elements. Expenditure associated with our business simplification program was £10.7 million in the first half and is expected to be around £9 million in the second. I will provide a progress update on the next chart. Our ERP program has progressed to plan, with implementation at the pilot site in Italy now substantially completed. Work is progressing to accelerate the rollout during 2026.
Moving on to the simplification program in more detail, a reminder that the weak market conditions experienced later in 2024 have led us to expand the program such that we expect to deliver £27 million of savings by 2026. The £7.6 million delivered in the first half provided a material mitigation to the weak market conditions. Activity centered on the closure of a site in the U.S., as well as back office restructuring and manufacturing headcount reduction across the group. The current rate of expenditure will continue in 2025, with around £9 million expected in the second half, followed by a further £5 million in 2026 as we conclude the program. As previously noted, our manufacturing sites have reduced from 85- 60 over the last 10 years, a reduction of 29%.
As previously announced, we have scaled back our investment in semiconductor capacity in response to the slower than expected growth in battery electric vehicles. Our latest estimate is that this will amount to £56 million over the three years to 2026, with most of that having already been incurred. This level of investment provides us with the essential services and equipment needed for likely demand requirements in 2026 and 2027 as demand returns. We will then be able to match incremental capacity additions as the pace of recovery becomes clearer. We therefore expect capital expenditure to amount to around £70 million this year, with £40 million having been incurred in the first half, then to be in the range £50 million- £60 million for the next two years. This allows for investment in capacity for growth in other markets where we are seeing strong demand.
We would also note likely startup costs of the order of £7 million that will be incurred in 2026 as the semiconductor investments are commissioned. Finally, on technical guidance, we would expect net debt to remain within our guidance range of £230 million- £250 million and year-end leverage to be around 1.5x . Our net financing charge will remain in the £18 million- £20 million range, and our effective tax rate in the 26%- 28% range. Our dividend for 2025 will remain in line with that for 2024, and we would intend to return to cover of around two and 0.5x as markets recover. I would also note that so far the direct impact of tariffs has been immaterial. We continue to note the potential for indirect impact on end market demand. Thank you, and I would now like to hand back to Damien.
Thank you, Richard. I am delighted to take the lead at Morgan Advanced Materials, a global leader in advanced materials. As I mentioned earlier, my time at the group within Thermal Products has allowed me to understand and experience the operating model and our empowering, candid, and growth-minded culture. Whilst we continue to have difficult market conditions to navigate, Morgan is a high-quality business, well-positioned in attractive markets, and I see significant opportunity ahead. There is a common thread emerging from my experience with Thermal Products and my recent exposure to the rest of the group. As the global leader in advanced ceramics and carbon, we are uniquely positioned to design and supply the higher performance, better design, more integrated materials and components, which the industry needs to respond to several globally significant megatrends.
I have spent my entire career in specialty additives, processing aids, materials, and I have rarely seen such a quality business. Well-positioned in attractive markets with significant opportunity ahead. I would like to touch on some of my observations on the strengths of the group. Our products and solutions portfolio is very well placed for growth and value, driven by three megatrends. The first one is carbon reduction. There is a structural shift across multiple industries to higher efficiency equipment, lower carbon processes, and electrification. These trends raise considerable material challenges for our customers, and our advanced ceramics and carbons are, in many cases, well placed to solve these challenges. For example, we're uniquely capable to manufacture thin and complex shaped casting cores for the manufacture of jet engine blades, allowing them to operate more efficiently at temperatures above their melting point.
We are gaining market share after being selected for several new jet engines precisely because of these capabilities. The second is advances in healthcare, which also bring material challenges in medical devices and implants, in diagnostics equipment, and in drug delivery. Our Technical Ceramics are a material of choice, notably due to their biocompatibility, non-toxicity, their durability, their resistance, and their customizability. We are addressing complex requirements such as the miniaturization of implantable devices. The third is the ascent of power electronics, which enables advances in electric vehicles, AI, and power storage. The wider adoption of this technology depends on the reduction of its cost, which raises opportunities for our advanced materials. Our advanced graphite system provides significant efficiency gains in the manufacturing of silicon carbide semiconductor. To address these material challenges, our technology leadership is a key differentiator. It consists of three things.
We co-develop with the customer commercially viable manufacturable solutions for their needs. The level of prowess in design and production engineering, which I have seen our colleagues deploy in complex cases, is truly impressive. Their passion, their creativity, their expertise, and collaborative approach create customer loyalty to Morgan . Second, we apply material science to develop differentiated solutions. Ceramics, carbons, and graphite are very versatile materials. Our scientists adjust their physical characteristics within a wide range to formulation and processing parameters. Three months ago, we launched a new carbon brush for wind turbines, where we have configured our material surface to enhance performance and use significantly less silver than our competitors. The third is that across the group, technology development is managed in close commercial alignment with our customers, and it is focused on the strategically selected roadmaps which are set by each of our businesses.
This leads me to another key strength, which is our decentralized model. At Morgan , the business decision maker is closely connected to the customers, and he and she ensures that we are in step with their needs. Financial accountability is decentralized as well, and our business leaders have a knowledge mindset. They act and react with agility to achieve their financial goals. Our customers come to us because of their experience of our product quality and collaboration in design. In customer surveys, this is where we score the highest. Together with a thorough and complex qualification or certification process, this creates a loyal and sticky customer base. Last but not least, our financials are robust. We have double-digit margins. We have a strong ROIC, which is evident through the cycle, and I'm confident that both will expand quickly when markets return to growth.
Our financial performance is underpinned by simplification, agile cost management, and our embedded practices of continuous improvement. We maintain a robust and prudent approach to capital allocation, helping to deliver strong returns to our shareholders. Let me now turn to my initial thoughts about where I see opportunities to unlock significant value. We have a well-established and successful practice of simplification. As mentioned before, our current simplification program is progressing to plan and will complete as expected during 2025. I can see potential for further opportunities to optimize our footprint and our administrative processes. We have also made investments in data management in the past two years, which provide more visibility on product flow. With our smaller number, a more agile set of sites, we can further improve operational gearing as we move forward. We are not yet making the most of the scale of the group and supply chain.
In procurement, our indirect spend of more than £150 million is managed at site level. The opportunity to consolidate the spend and proactively manage the key categories provides scope for material savings. Another opportunity in supply chain lies in enhancing revenue by improving delivery performance. In my outreach and travel throughout to our sites, I was struck by the correlation between profit margin and growth rate on the one hand, and lead time and delivery reliability on the other hand. There are also high-quality growth opportunities within our current field of expertise. Given the simplified manufacturing footprint, we are able to respond to opportunities and bring in new capacity in a modular and disciplined way. Besides, across the portfolio, there are opportunities to expand from component supply to system supply over time. We do this, for example, in fire protection or in implantable devices. Our margins are higher.
We're a party or the owner of the certifications and qualifications, and the switching barriers are higher. Finally, the advanced materials universe in which we operate is ample. There is opportunity to leverage our expertise, our channels to market, our strong commercial customer relationships to move into other high-quality, high-growth adjacencies, organically and inorganically. Conversely, we shall strive that each part of our business portfolio contributes to the progressive improvement of the quality of our business. I will provide further comments on this at a separate event in December. You will be familiar with this slide. I'm confident that we are well positioned to deliver on the objectives laid out in the financial framework as our markets recover. Moving on now to the outlook. We are cautious about demand in a number of our end markets as the geopolitical and economic environment remains uncertain.
Therefore, revenue guidance for the full year remains unchanged, with organic constant currency revenue expected to decline by a mid-single-digit percentage level. This assumes that the market stabilization in the first half continues, but with no expectation of recovery in the second half. We expect profitability to be around the bottom end of the consensus range, impacted by weak market conditions, by the mix effects previously mentioned, and foreign exchange headwinds. We expect free cash flow to normalize during the second half of the year as investments in ve semiconductor capacity and our simplification programs are now both nearing completion, and this will assist in a return to a leverage of 1.5x by the end of the year. Looking towards 2026, we note early signs of stabilization, but we remain cautious about the end market demand given the ongoing external uncertainty.
We expect to commission our new semiconductor capacity during 2026, and this will incur one-off start-up costs of approximately £7 million as a result. A few concluding remarks now before we end up, we open up to any Q&A you may have. As we have highlighted and as expected, market conditions continue to be challenging. As a team, we continue to actively control what is within our grasp, and we have delivered a leaner and more efficient business. As I highlighted, we have some fantastic strengths and capabilities as a group. These are strong foundations, and we have significant opportunities for further enhancements. I believe that we are well positioned to rapidly grow profit when markets come back. Finally, I would like to thank all the group's employees for their dedication and commitment to our success. Thank you. That ends our formal presentation, and we will now take questions, and I will hand this back to the operator to coordinate that.
Thank you. As a reminder, if you would like to ask a question on today's call, please press Star, followed by one on your telephone keypad now to enter the queue. When preparing to ask a question, please ensure you are unmuted locally. Our first question comes from Scott Cason from InvesTech. Scott, your line is open. Please go ahead.
Thank you, and morning everyone. Just a couple of questions from me, please. The first being around semiconductor. Could you just talk us through some of the drivers behind the large year-on-year revenue declines and how you see that playing out through the rest of the year? On top of that, how do you see profitability net the £7 million one-off cost in semiconductor for the group? The second question is, could you give us any flavor of some of the adjacent areas that you could look to move into over time? Thank you.
Okay, thank you, Scott. I'll take the first one. I'll hand over to Richard for the second and be back for the third one. Semiconductor, as you know, our business in semiconductor is really split in two areas: silicon carbide semiconductor and silicon semiconductor. These have slightly different dynamics. In silicon semiconductor, there was a slowdown, which was not as large as in silicon carbide. We are now seeing some signs of recovery. It's slow, but it's real. We've seen an increase in demand in the second quarter, and that's probably going to continue at a moderate pace. Silicon carbide, the significant decline that we noticed in the second half of last year and that accelerated in the first half of this year, is essentially driven by the fact that the end demand has reduced and that there was a significant buildup of inventory along the supply chain.
That's essentially what's driven the acceleration of the decline in the first half. There is still inventory in the supply chain. Everybody expects, and our customers expect, that it's going to take some time to be resolved. However, the end markets remain very attractive, and the underlying demand is there. It's continuing to grow at double-digit rates.
Morning, Scott. Startup costs, firstly, £7 million is not a huge amount. These are known processes. What we're anticipating is being ready for production out of those new assets during or by the end of 2026. If you go back to when we first started talking about semiconductor, we had anticipated demand in 2026. At the time, the startup costs were simply being swallowed by the gross margin on that demand. We're not calling when the market is going to recover. Damien has just made the point that there are still particularly inventories in the silicon carbide supply chain. What this is describing is getting ready next year, but not anticipating exactly when that demand is going to pick up.
Coming back to the opportunities to unlock significant value, as you've seen, they're of different nature. Some are really of operational excellence nature and we have the systems to activate them. Some of them are going to be implemented more and more sequentially in terms of growth in targeted high-value areas and extending into system supply. This is going to be taking a different time depending on the nature of the initiative. I'll be coming back in December to share more about the time and the impact of these actions.
Thank you very much.
The next question is from Jonathan Hunt from Barclays. Jonathan, your line is open. Please go ahead.
Hey guys, good morning. Just two questions from me. Firstly, just coming back to that sort of semiconductor CapEx, obviously that has come down. In terms of that sort of revenue opportunity from that CapEx, now how do we think about that? Is kind of £37 million the right number in terms of the revenue opportunity there? Just sort of linked to that, what are we seeing in terms of customer behavior and sort of filling that capacity that you put in line? Is that still all okay? Are some customers deferring their sort of orders into you? Are you seeing sort of that sort of expected capacity utilization coming down? That was the first question. The second one was just in terms of that, one of your final slides, just in terms of those sort of upside to the simplification savings.
Just thinking about that going forward, does that mean ultimately we probably will see upside to that £27 million number that's currently out there? If we do, when does that start to come through? Is that more of a £26 million type timing? Or in terms of those incremental savings, does that mean we should get another sort of raft of profit sort of savings coming through in £27 million? Those are the two. Thank you.
Okay. Morning, Jonathan. Thank you for those. Yeah, semiconductor CapEx. We are still confident that the investment will achieve our target return on capital of 20% or better, that the growth in the business will be at attractive margins. As Damien has described, we're not calling when the market will start to recover. We would expect to be achieving those outcomes as the market recovers, but not at this time, making a prediction of when that will be. As far as our customers are concerned, they are depleting their stocks, and they are in this phase of reducing the inventory through the supply chain. They're part of one of the steps along the supply chain. We are extending contracts, renegotiating contracts that we had. We are continuing to work with them on the next stages of technology development.
Actually, when they're down, it's a good time to continue to improve technology, and there is a lot of action going on in this area. The commitment of our customers with our technology remains. They have the same lack of visibility as we have as far as when the demand is going to come back. I think on the simplification, Jonathan, your question is a good one. Damien is currently leading a strategy review, has indicated that he will want to talk to the market later in the year. Of course, we have ideas about how we may achieve further simplification, but I would prefer to leave it until later in the year to describe what those look like.
Thank you, Richard. Can I just come back to that sort of revenue opportunity? I'm just trying to get more clarity there, because I think when we heard from you last, you said there was £40 million. If we sort of pro-rata that on the reduced CapEx, it kind of gives us a little decline to that £40 million. Obviously, I'm very aware that you don't want to call out a number, but is that kind of the right way of thinking about it, that we should sort of pro-rata it in terms of the CapEx decline?
Not really. I would view it as timing. We have put in services and infrastructure. We have put in sufficient capacity to meet what we think the demand will be over the next couple of years or so. We left it in a position where, as the increase in that demand becomes clearer, we can add in incremental capacity relatively easily. That says, you know, one permutation is we end up with a program, you know, very similar to what we originally envisaged. That will all depend on timing of recovery in the market.
Okay. Very clear. Thank you very much, guys.
The next question comes from Harry Phillips from Peel Hunt. Harry, please go ahead. Your line is open.
Good morning again, everyone. Just again, two or three questions, please. The first is on the one-off contributions in the first half. In the statement, there's a £5 million gain, non-recurring in carbon. What exactly was that? What was the sort of variations around one-offs, non-recurring in that number? The second, sort of afraid to continue on the semiconductor angle, is to sort of acknowledging the £7 million startup cost. Basically, I'm sort of taking that to mean there's going to be very little volume in 2026. If there's no volume in 2027, just hypothetically, does that £7 million remain a £7 million drag, or is there any mitigation even in a sort of totally flat market or zero market? That's it for now. Thank you.
Morning, Harry. Thank you for those. One-off contribution of £5 million. If you cast your mind back three years, there was in the notes to our accounts at one point reference to a dispute with a customer out of the old seals and bearings business. That was a provision of £2 million at the time. We have successfully concluded the claim with that customer. In fact, the payment from them in the end was £3 million. That was very helpful, and the balance is just an insurance receipt. That is what they are. Clearly, we call those out because they're material taken together. There's always a degree of one-offs like that in the business. It doesn't mean you automatically assume that the second half will be £5.5 million worth, but certainly that has had a small beneficial effect on the first half.
I think your question about semiconductor startup cost is a fair one. Whilst we would not want to call the substantial recovery in that market, I think we'd be a little bit surprised if we weren't seeing some degree of recovery in 2027. I wouldn't necessarily expect that to be a stranded cost.
Fantastic. Thank you.
Next question comes from David Farrell from Jefferies. David, please go ahead.
Hi. Thanks very much for taking my questions. Sorry to kind of continue the theme of semiconductors, but I guess kind of clearly the market is reacting today to that incremental £7 million of cost in semiconductors. If the market isn't there, why not defer commissioning of these assets to a later date when the market has recovered?
David, if you know we get, and by the way, the commissioning is in the second half of next year. If we get to that period and the market is still not recovering, I suspect we won't incur the cost. You know, we'll assess it as time goes on.
Okay. Just kind of a follow-up question on semiconductors. Clearly, we go back a couple of years. This was a really strong growth market. You're in a really strong position in terms of lack of supply into the market. We've kind of flipped reverse that now. Are these contracts that you're going to enter into going forward going to be lower margin because your customer has a much greater depth of supply available to it?
Yeah, very good, very valid question. There's definitely, when there is a bit more supply, there is a bit more of price pressure. However, the nature of what we do is really very core to the cost performance of our customers. I think the main driver in this industry is that there is a significant drive to reduce the cost of the end product of the silicon carbide semiconductors. When the design of your graphite recipients, where the semiconductor is being manufactured, has a significant impact on yield and on throughput and on the capability to increase the size of the balls that you make, the alignment of the customer with the manufacturer is quite strong. There is honestly very few people in the industry who can achieve the quality that is required to deliver the cost reduction that the industry is seeking. We are very confident that we will be able to deliver good returns on the investment that we've made.
Okay, thank you very much.
The next question comes from Maggie Schooley from Rothschild & Co Redburn. Maggie, your line is open. Please go ahead.
Yep. Good morning, Damien. Good morning, Richard. Thank you for taking my questions. I just have a few. On your 2026 guidance, I think you've well explained the overstocking in silicon carbide and what you're seeing there and then the knock-on cost. Beyond semiconductor and other markets, is there anything that's driving that caution for 2026? I'm thinking particularly of Thermal Products. Can you tell us anything that you're seeing there that we should be thinking through in terms of prolonged weakness in Thermal Products into 2026, or are you starting to see that stabilization towards the upside, or any color you can give us on that?
Yeah. Thanks, Maggie, for the question. As I mentioned, we have seen an uptick, a slight uptick sequentially in the core business in general of 4%. That includes the industrial, petrochemical, and metals and mining businesses. There are clearly signs of stabilization in this market. What we're doing is prudently, we don't assume that this market is going to rebound significantly. In fact, we had some good activity in the U.S. in the first quarter. It's now reversed a bit. We had some good activity in Europe in the second quarter. It's kind of stalling, however, good project activity. We're basically seeing a stabilization, and we think that we don't see signs that this is going to expand. That's why we made the forward-looking statement that we made. The other markets, I mean, defense, aerospace, are going to continue. Question mark about our automotive supply business, which has been impacted by the state of the industry in the first half.
Okay. Thank you. I think I recognize you've given us a clear understanding on tariffs. There have been some semiconductor tariff announcements overnight. I don't think they affect you, but could you just comment if there's anything we need to be concerned about? I understand it's a moving system. It was just announced overnight, but anything we should think about there?
Morning, Maggie. I don't think so. We have briefly digested what's come out overnight. As before, our most significant flows are, for instance, from Mexico into the U.S. Those products are covered by the previous trade agreements and are not subject to tariffs. There are relatively minor flows from Europe into the U.S. that are now subject to the 15% tariffs, but most of our products are on a factory-gate pricing basis, so we don't see tariffs on those either. Hence the comment that the direct impact of tariffs is to the material.
Okay. The last one from you. You clearly outlined that you think you're going to be down to 1.5x net debt since you even saw it by the end of the year. I understand the comments on working capital, but are there any other levers that we should be thinking about to ensure that we get back to that 1.5x ?
Just really the combination of more steady progress on working capital, lower CapEx, lower simplification costs should get us there.
Okay, thanks very much. I appreciate the comments.
As a reminder, that's Star, followed by one on your telephone keypad to ask a question today. The next question comes from Richard Paige from Deutsche Numis. Richard, please go ahead. Your line is open.
Thank you. Morning, both. Just a couple of add-ons to previous questions. The mix in terms of end markets, I think clean energy and transportation, the growth in the first half, could you just give a bit more detail on that, please, and visibility into the second half in that market? Secondly, just not wishing to overstress the questions on semiconductor, could you just remind us the lead times you need to bring in capacity when market conditions change, please?
Thank you, Richard. Clean energy and transportation is a small part of the revenue. It's really evolving depending on order pattern, on customer demand, etc. I wouldn't read too much into the evolution. It was significantly high, and it moved a lot from half to half.
Morning, Richard. The answer to your second question is a little bit it depends. Finishing equipment is actually very quick to procure, sort of 3-4 months. The reason why we progressed with the bulk of the investment was it covers furnace capacity, which takes quite a long time to build, something like 18 months. There is certainly sufficient furnace capacity put in for the time being, and we would be able to add in more over time.
Brilliant. Thank you both.
No further questions at this time. As a final call, that's Star, followed by one. We have no further questions, so I hand the call back to the management team for any closing comments.
Thank you, everybody, for good questions. Clearly, as I said, in challenging markets, we're doing all the self-help and taking all the actions that are required. I'm very optimistic about the future of this business and its capability to get into this framework that we've set for ourselves. I look forward to sharing a bit more of this in December.