Industrial materials group Morgan Crucible has returned to profit in the first half helped by a shift of its operations to lower cost countries.

The group, which owns technical ceramics facilities in Stourport- on-Severn and Rugby as well as a crucibles business in Norton, turned around a £5.6 million pretax loss last year into a £15.1 million profit.

This was despite a fall in sales from £406.2 million to £391.7 million in the six months to July 4.

The Windsor-based firm said its profits improvement plan, which was announced in February 2004 remained on track.

Chief executive Warren Knowlton said: "We are delivering on our promises and have shown good progress toward our commitment of achieving double digit operating margins by the end of 2006.

"In addition to improved financial performance we are now also seeing the benefits of our strategic repositioning both of the group overall and of each of the individual businesses." He said the company's profit improvement plan remained on track to deliver £50 million of extra income every year by 2006 at a total cost of £70 million.

Morgan managed to reduce its costs base by moving a larger amount of its operations away from "high cost regions" such as America to lower cost areas including China.

At the end of the first half of 2005, around 45 per cent of its 13,500 employees were situated in lower cost countries, the company said. This compared to less than 40 per cent at the end of 2004 and 24 per cent in

2002.

Mr Knowlton said: "This, combined with ongoing reductions in overheads, is driving down our total employment costs as a percentage of sales from around 40 per cent in 2003 to 36.8 per cent in the first half of 2005."

As well as cutting costs, Mr Knowlton said the business was also targeting top line growth by focusing on market segments with less cyclically and less price commoditisation.

He said: "We are also aiming to increase the value-added component of our offering via technological leadership and a higher level of product customisation."

The group said it would continue its no divided policy until it had achieved a level of sustained profitability.

Profits and sales at its carbon, magnetics and technical ceramics divisions improved during the period, but trading conditions for the crucibles business worsened against a background of generally poorer economic forecasts and falling demand in Europe.

This was exacerbated by rapid rises in raw material and fuel and energy costs, which put pressure on margins and dented confidence in the prospects for recovery of the foundry sector and its supply chain.

Mr Knowlton said: " Geographically we expect our European markets to remain weak for the foreseeable future."