TIDMVCT
RNS Number : 6371V
Victrex PLC
05 December 2023
5 December 2023
Victrex plc - Preliminary Results 2023
'PBT in-line & record Medical revenues'
*New mid-term growth targets*
Victrex plc is an innovative world leader in high performance
polymers, delivering sustainable products which enable
environmental and societal benefit. This announcement covers
preliminary results (audited) for the 12 months ended 30 September
2023.
FY 2023 FY 2022 % change % change
(reported) (constant
currency(1)
)
Group sales volume 3,598 tonnes 4,727 tonnes -24% N/A
------------- ------------- ------------ -------------
Group revenue GBP307.0m GBP341.0m -10% -13%
------------- ------------- ------------ -------------
Average selling GBP85.3/kg GBP72.1/kg +18% N/A
price (ASP)
------------- ------------- ------------ -------------
Gross profit GBP162.6m GBP174.5m -7% -10%
Gross margin 53.0% 51.2% +180bps N/A
------------- ------------- ------------ -------------
Underlying profit
before tax (PBT)(1) GBP80.0m GBP95.6m -16% -18%
------------- ------------- ------------ -------------
Reported PBT GBP72.5m GBP87.7m -17% -19%
------------- ------------- ------------ -------------
Underlying EPS(1) 77.7p 95.0p -18% N/A
------------- ------------- ------------ -------------
EPS 70.9p 87.6p -19% N/A
------------- ------------- ------------ -------------
Dividend per share 59.56p 59.56p flat N/A
------------- ------------- ------------ -------------
Highlights:
-- PBT in-line# after challenging year
- Underlying PBT in-line at GBP80.0m; reported PBT GBP72 .5 m
- FY 2023 volume down 24%; Group revenue down 10%
-- Significant weakness in Electronics, Energy & Industrial, VAR
-- Record Medical revenues +12% & broad-based growth; strong Aerospace performance
-- Robust cost discipline whilst prioritising Medical & innovation investment
-- Strong average selling prices; improved gross margin
- ASP up 18%, driven by price increases (& mix/FX)
- FY 2023 gross margin up 180bps, offset by lower asset utilisation
-- Well placed for macro-recovery, with new strategic growth targets
- Targeting mid-term revenue growth of 5-7% CAGR(##) based on core & new applications
- Upside potential to 8-10% CAGR driven by mega-programme commercialisation
- Targeting GBP25m-GBP35m of revenues from mega-programme portfolio in FY 2025
- Decarbonisation targets submitted to Science-based targets initiative (SBTi)
-- Mega-programmes prioritised to drive enhanced commercialisation
- Investment prioritised in streamlined portfolio: Aerospace, E-mobility, Knee, Magma, Trauma
- Key milestones delivered in pathways to GBP10m revenue:
-- E-mobility: GBP6m revenues, ahead of expectations & new customer collaborations
-- Trauma plates: growing demand & broader customer opportunities
-- Knee: clinical trial & top 5 OEM collaboration, 2-3 years to 1(st) sales
-- Aerospace: broader customer portfolio for composite parts & revenues growing
-- Magma: supporting TechnipFMC for Brazil scale up
-- Strong balance sheet & opportunity for cashflow improvement
- FY 2023 available cash(1) GBP30.1m (FY 2022: GBP66.0m) after major capex & higher inventory
- Well invested assets: new China facilities ready & UK facilities upgraded
- Inventory set to unwind from FY 2024 (FY 2023 inventory GBP134.5m vs FY 2022 GBP86.8m)
- Final dividend (###) maintained at 46.14p/share, reflecting confidence in future performance
(1) Alternative performance measures are defined in note 16
#in line with revised June 2023 guidance of GBP80m-GBP85m
underlying PBT
##revenue CAGR in 5 year period
###Proposed
Commenting on the Group's preliminary results, Jakob Sigurdsson,
Chief Executive of Victrex, said :
"After one of the most challenging years for the Chemical sector
and for Victrex, the Group delivered in line with guidance#. Strong
average selling prices, continued innovation, cost discipline and
well invested assets demonstrate the strength of our Polymer &
Parts strategy and business model. Record revenues in Medical -
with a new goal for Medical to double in five years and contribute
around one-third of revenues in less than 10 years - and growing
opportunities in China, with our new facilities ready to start up,
underpin our belief in the core and our mega-programmes.
Confidence in our strategy & new mid-term growth targets
"We have today set out new mid-term growth targets of 5-7% CAGR
for revenue, with an opportunity for 8-10% as our mega-programmes
further commercialise. PBT has the opportunity to grow faster than
revenue, as operating leverage improves and overhead investment
moderates. These targets reflect the opportunity from a
macro-economic recovery and industry indicators across Automotive,
Electronics and General Industrial, with the ability for our core
business to grow faster than the wider market through new and
differentiated applications. As our mega-programmes further
commercialise, we see additional upside potential. Investment is
now being prioritised around five key mega-programmes, offering
substantial opportunity across Aerospace, E-mobility, Knee, Magma
and Trauma. Several programmes are on the pathway to GBP10m
revenues and we are targeting GBP25m-GBP35m of revenues from the
mega-programme portfolio in FY 2025. With further long term upside
in the Medical programmes particularly, the total portfolio
opportunity remains broadly unchanged. Whilst Gears saw further
growth to GBP6m revenue, it is well down the adoption pathway and
enables us to prioritise investment elsewhere.
Further progress in mega-programme portfolio
"All of our mega-programmes met key technical or commercial
milestones during the year. Our E-mobility platform, focused on
electric vehicle applications, saw the strongest growth, ahead of
expectations with GBP6m revenues, new customer collaborations and
increasing penetration in major car brands.
"In Medical, we saw strong progress in Trauma and commercial
revenue building towards GBP1m. In Knee, our collaboration with a
top 5 Knee company in Aesculap (B Braun), and our partner Maxx in
the clinical trial, as well as engagement with major customers,
offers the potential for a commercial PEEK Knee in 2-3 years.
Outlook - a slow start but well placed for recovery &
growth
"The Group is expecting good progress in revenue and PBT for FY
2024, subject to an improving macro-economic outlook. Volumes have
the potential for double-digit growth although, at this early
stage, we have yet to see signs of a macro recovery, with a slow
start to our typically seasonally weak Q1. Consequently, growth is
expected to be second half weighted, which is consistent with some
end-market indicators pointing to improvement during 2024. Demand
continues to be soft in Electronics, Energy & Industrial and
VAR. Automotive and Aerospace remain positive, with Medical also
expected to deliver full year growth.
"Input costs are tracking lower year-on-year, although the
potential for energy volatility remains. Within operating
overheads, we expect only limited increases, despite wage inflation
and bonus accrual. However, the effect of lower asset utilisation
and start-up costs in China will have some effect on our cost of
manufacture and gross margin. In relation to currency, whilst spot
rates imply a headwind, our hedging will offset this impact to
PBT.
"Overall, the Group is well placed for recovery and growth. With
a strong and diversified core business, increasing
commercialisation in our mega-programmes, well invested assets and
incremental capacity, and the opportunity for cashflow improvement,
our investment proposition remains strong."
About Victrex:
Victrex is an innovative world leader in high performance
polymer solutions, focused on the strategic markets of automotive,
aerospace, energy & industrial, electronics and medical. Every
day, millions of people use products and applications which contain
our sustainable materials - from smartphones, aeroplanes and cars
to energy production and medical devices. With over 40 years'
experience, we develop world leading solutions in PEEK and PAEK
based polymers, semi-finished and finished parts which shape future
performance for our customers and our markets, enable environmental
and societal benefits, and drive value for our shareholders. Find
out more at www.victrexplc.com
A presentation for investors and analysts will be held at 9.
00am (UK time) this morning via a dial-in facility, which can be
accessed by registering on the following link:
https://services.choruscall.za.com/DiamondPassRegistration/register?confirmationNumber=5475738&linkSecurityString=e8f40c1d8
The presentation will be available to download from 8.30am (GMT)
today on Victrex's website at www.victrexplc.com under the
Investors/Reports & Presentations section.
Victrex plc:
Andrew Hanson, Director of Investor Relations,
Corporate Communications & ESG +44 (0) 7809 595831
Ian Melling, Chief Financial Officer +44 (0) 1253 897700
Jakob Sigurdsson, Chief Executive +44 (0) 1253 897700
Preliminary results statement for the 12 months ended 30
September 2023
'PBT in-line & record Medical revenues'
*New mid-term growth targets*
Operating review
Volume and revenue down, despite record Medical performance
With a continuing challenging trading environment during the
second half, full year Group sales volume of 3,598 tonnes was 24%
down on the prior year (FY 2022: 4,727 tonnes). In line with
similar declines seen across the Chemical sector, the Group
delivered full-year revenue of GBP307.0m, which was down 10% (FY
2022: GBP341.0m). In constant currency(1) Group revenue was 13%
down on the prior year.
H2 2023 volume and revenue
Trading in the final quarter (Q4) remained similar to Q3,
resulting in a H2 2023 sales volume of 1,657 tonnes (H2 2022: 2,463
tonnes), with H2 2023 revenue of GBP144.8m down 20% (H2 2022
revenue: GBP180.9m). With the weaker macro-economic environment
impacting several end-markets, our FY 2023 result was achieved
through a combination of a strong focus on pricing and cost
discipline, including minimising discretionary spend and deferral
of certain recruitment. Investment was sustained in our priority
areas of Medical and innovation to support differentiated
applications or mega-programme commercialisation.
Divisional performance
Despite weakness across several end-markets in our Sustainable
Solutions (formerly Industrial) area, primarily Electronics, Energy
& Industrial and our Value Added Resellers (VAR) area, we saw a
good performance in Aerospace, with volumes up 20% as build rates
increase, together with new application growth. VAR was the weakest
area, with volumes down 39%, driven by destocking and weak demand.
Whilst Automotive volume was stable (and up in revenue terms), we
note that 2024 market indicators support the opportunity for
growth, with car sales set to increase by 1-3% (S&P November
2023). Revenue in Sustainable Solutions was down 14% at GBP241.8m
(FY 2022: GBP282.7m).
Medical revenues of GBP65.2m were a record and increased by 12%
compared to the prior year (FY 2022: GBP58.3m), driven by broad
based application growth. Across our core business of Spine,
Arthroscopy and Cranio Maxillo-Facial (CMF), we continue to see
good growth opportunities, with support from increasing penetration
in Cardio, Orthopaedics and Drug Delivery. Our Non-Spine area
represents the most significant growth opportunity, as PEEK's inert
nature and strong biocompatibility drives increased application
usage. Revenues in Medical are now 46% Spine and 54% Non-Spine.
Growth was broad based by region, with Asia driving the highest
revenue growth of 31%.
Strong ASP driven by pricing & sales mix
FY 2023 saw good progress in recovering the significant energy
and raw material inflation seen over the past two years. Average
selling prices (ASPs) increased by 18% to GBP85.3/kg, driven by
price increases, sales mix and currency. The overwhelming majority
of price increases were achieved via structural price
increases.
For FY 2024, we anticipate average selling prices will remain
comfortably in excess of GBP80/kg. This reflects some expected
recovery in end-markets within Sustainable Solutions, which will
result in a slightly less favourable sales mix.
Core business application pipeline
Despite a challenging macro-economic environment, we continue to
build our core business growth pipeline, to support PEEK's use in a
range of applications, driven by its lightweighting, durability,
chemical and heat resistance, or other properties.
Mature Annualised Revenues (MAR), which reflect the pipeline of
incremental opportunities in the core business, was robust at
GBP300m (FY 2022: GBP294m). This number assumes all targets are
converted. Automotive and Medical opportunities showed the highest
year on year growth, reflecting the increasing range of
applications within these end-markets.
Sales from new products increased to 7%
Our measure of Sales from new products revenue increased to 7%
of Group revenue for FY 2023 (FY 2022: 6%). From FY 2023, sales
from new products was based on new products and grades, including
some mega-programmes, introduced over the past seven years, rather
than from FY 2014. Recent examples of new product grades included
in this definition being our Victrex XPI(TM) polymer for E-mobility
and Victrex PC101(TM), a medical grade for use in drug delivery
devices.
Going forward, our priority will be on measuring our newly
introduced goal of mega-programme portfolio revenues.
Mega-programme highlights: investment prioritised &
streamlined portfolio
With several programmes on their journey towards GBP10m revenue
per annum (Aerospace, E-mobility, Magma and Trauma), we have chosen
to prioritise investment in five key programmes to enhance
strategic progress. This also ensures that we measure appropriate
investment, resource and capability in order to improve our
returns.
PEEK Gears continues to see good growth and opportunities in ICE
and EV platforms, but as the focus is now on progressing adoption,
it will no longer be defined as a mega-programme and will be
overseen as part of our core business, as we prioritise investment
in E-mobility and elsewhere. PEEK Gears delivered growth to GBP6m
revenue this year, vs over GBP4m in FY 2022. Having successfully
seeded the market, it also reflects that the route to market is via
both parts manufacture and polymer resin based sales, where a third
party manufacturer would build the final component, based on
Victrex design, development and know-how. As a result, there has
been no significant change in the overall portfolio value, with
several mega-programmes offering revenue potential of significantly
more than GBP50m per year (e.g. Knee).
Key highlights in our mega-programme portfolio include:
Our E-mobility mega-programme platform is based on specific
electric vehicle applications and drove the most growth of all
mega-programmes during the year, with business wins specifically
focused on wire coating and other applications. This programme
delivered revenue of GBP6m this year, with better than expected
progress as our materials supported major car brands. This
mega-programme includes Victrex XPI (TM) grade, which enables
coatings of tightly wound electric wires for existing and primarily
next generation high-voltage vehicles (800 volt batteries and
applications), where higher performance is required. Compared to
previous enamel coatings, VICTREX XPI(TM) is extruded onto the
copper and requires less energy in the process, supporting
sustainability goals. With penetration in battery applications and
elsewhere in electric vehicles, we assess the future potential PEEK
content per electric vehicle as over 200g (average content in
existing internal combustion engine car approximately 10g today).
We are collaborating with multiple customers, and signed a
strategic collaboration agreement with Well Ascent, a major wire
coating manufacturer, supplying into European, Asian and US car
manufacturers, including existing Chinese models. Continued growth
in E-mobility is expected during FY 2024, with the potential for
GBP10m revenue within two years.
In our Magma composite pipe programme for the energy industry,
we saw close collaboration with TechnipFMC and a team from the
end-customer in Brazil, including detailed technical and commercial
meetings hosted at our UK facilities. The primary focus is
supporting TechnipFMC to accelerate the significant opportunities
for thermoplastic composite pipe in deepwater oil & gas fields
in Brazil, with light-weighting, durability, a reduced carbon
footprint for installation and ease of manufacturing being key
parts of the proposition. Multiple field opportunities are being
targeted in Brazil, requiring alternative solutions to existing
performance issues with metal-based pipes. PEEK based Hybrid
Flexible Pipe (HFP) is seen by TechnipFMC as the most cost
effective riser solution, with TechnipFMC constructing a new pipe
extrusion facility in Brazil, incorporating Victrex's pipe
extrusion know-how. We continue to await outcomes on existing bids
by TechnipFMC, utilising this technology, which offers the
potential for a step up in volume from 2025. This programme offers
good mid-term potential towards GBP10m annual revenues with the
next key milestone being bid outcomes.
In Trauma, we saw a significant step up in demand post FDA
approval and launch, with revenues building towards GBP1m this
year, and further expected growth in the coming years. This was
primarily driven by our partnership with In2Bones (part of CONMED)
and other customers for PEEK composite Trauma plates, supporting
fracture fixation, including in foot and ankle plates. Over 3,000
Victrex manufactured trauma plates were supplied for implants.
Studies show an enhanced union rate using PEEK composites rather
than titanium based plates . Victrex manufactures the PEEK
composite based trauma plates in-house, or via our partner, Paragon
Medical, who will toll manufacture in China, supporting a growing
customer base in the US, Asia and globally. This programme has the
potential for double-digit revenues within the next two to three
years.
In our Aerospace Composites programme, which combines the
programmes for smaller composite parts, larger structural parts and
interior applications, we are advancing qualifications with OEMs,
including Airbus and Boeing, and tier companies as thermoplastic
composites based on PEEK are validated and qualified. Major
structural parts include for wings, engine housing and fuselage.
The potential PEEK content per plane is at least 10-times current
levels, with large scale demonstrator parts being exhibited and
advancing through qualification programmes. We have also broadened
the number of customers we are working with as part of this
programme, beyond the Airbus Clean Sky 2 programme, reflecting the
significant opportunity for light-weight and easily processed PEEK
composite materials. In both structural and smaller composite based
parts, our AE (TM) 250 composite tape is integral to these
opportunities. Smaller composite parts currently being used on
aircraft include for use in seat pans and door brackets. Revenue
for these programmes in FY 2023 was nearly GBP3m, with the
potential opportunity to GBP10m in the next two to three years and
good long-term prospects.
In our PEEK Knee programme, we saw particularly strong progress.
We are working with Maxx Orthopaedics, our partner in the clinical
trial across Belgium, India and Italy, as well as Aesculap (part of
B Braun), a top 5 global knee company. We also have interest in the
progress of PEEK Knee from other top 10 organisations. 46 patients
to date have been implanted with a PEEK Knee, with no remedial
intervention required. Ten patients have also passed the two year
stage with no intervention, which is particularly encouraging. Both
of these companies, supported by our Medical business, are focusing
on the route to early commercialisation. Our offering has also
expanded beyond a cemented PEEK Knee implant, to include cementless
and tibia options, which enables us to offer a broader suite of
customer solutions. The next milestone is targeted as commencing a
US clinical trial during FY 2024. PEEK Knee would be an alternative
to existing surgeries, which primarily use metal (cobalt chrome).
Early assessment suggests the opportunity of first sales within two
to three years, subject to the appropriate regulatory pathway. PEEK
Knee remains the largest of our mega-programme opportunities by
annual revenue potential.
Innovation investment
Our new innovation investment during FY 2023 was primarily
supporting our Medical Acceleration programme. This includes an
investment in our New Product Development (NPD) Centre in Leeds,
UK, to support new roles and capability. R&D investment was
higher this year at GBP18.6m (FY 2022: GBP15.7m) representing 6% of
revenues on a full year basis, with the higher percentage
reflecting incremental investment and lower revenues. Our total
R&D investment in dedicated sustainable products or programmes
as a proportion of total R&D investment increased to 40% (FY
2022: 35%). This metric has been updated from prior disclosures,
which measured project-based, non-labour R&D spend in
sustainable programmes (92% for FY 2023 vs 89% for FY 2022), rather
than total R&D spend. A level of 40% of total R&D
investment in dedicated sustainable products or programmes
underlines our focus in this area.
Financial review
Gross profit down 7%
Gross profit was down 7% at GBP162.6m (FY 2022: GBP174.5m),
primarily driven by lower sales. Energy costs eased, yet raw
materials remained relatively high. We also incurred some
under-absorbed fixed costs (totalling approximately GBP3m) as a
result of lower production volumes compared to FY 2022 (production
volumes 9% lower). For FY 2024, we anticipate some modest benefit
from lower input costs, offset by start-up and under-utilised asset
costs in China (including costs moving from overheads to COGs), as
well as depreciation and lower asset utilisation (UK and China), as
we start to gradually unwind inventory from its high level.
Gross margin slightly ahead
Full year Group gross margin of 53.0% was 180 basis points (bps)
ahead of FY 2022 (FY 2022: 51.2%), supported by improved pricing
and a favourable sales mix. Second half Group gross margin of 52.4%
was slightly below the first half, impacted by lower asset
utilisation and the corresponding impact on under absorbed fixed
costs. The impact from losses on forward hedging contracts was also
higher than the prior year.
We remain focused on a mid-to-high fifty percent gross margin
level over the medium term, whilst noting that sales mix, asset
utilisation and the expected increase in parts contribution to
revenue will play a key role over the coming years. For FY 2024, we
anticipate Group gross margin will be slightly lower than the prior
year, reflecting start up costs in China and lower asset
utilisation as we start to unwind inventory over the next two
years. Currency also impacts gross margin.
Gains & losses on foreign currency net hedging
Fair value gains and losses on foreign currency contracts in FY
2023 were a loss of GBP7.6m (FY 2022: loss of GBP2.8m), largely
from contracts where the deal rate obtained in advance was
unfavourable to the average exchange rate prevailing at the date of
the related hedged transactions, following the devaluation of
Sterling from mid H2 2022. The corresponding spot rate benefit is
largely seen in the revenue line.
Currency tailwind in FY 2023
FY 2023 saw a currency tailwind of approximately GBP3m at profit
before tax (PBT) level, with most of this coming in the first half,
prior to Sterling recovering. At this early stage, spot rates show
currency for FY 2024 is tracking as a modest headwind. This is
prior to the impact of hedging, with gains and losses on foreign
currency net of hedging tracking as a small gain. We are mindful of
unhedged currencies - predominantly in Asia - which are set to
increase in importance as we see growth in China and other parts of
Asia over the coming years. Recent devaluation in these currencies
has contributed to the spot rate headwind in FY 2024.
Our hedging policy is kept under review, for duration of
hedging, level of cover and specific currencies. It requires that
at least 80% of our US Dollar and Euro forecast cash flow exposure
is hedged for the first six months, then at least 75% for the
second six months of any twelve-month period.
Operating overheads (1) up 5%; H2 overheads down 14%
Operating overheads(1) , which excludes exceptional items of
GBP7.5m, increased to GBP81.9m (FY 2022: GBP78.1m) driven primarily
by higher innovation spend (R&D is now separately disclosed on
the face of the income statement), with targeted R&D investment
commencing last year, primarily to support Medical acceleration. We
also saw wage inflation, including targeted cost of living payments
to support global employees at certain grades.
We also incurred costs to support the commercial ramp up for our
new China PEEK facilities. This facility will underpin further
commercial growth in this region over the coming years, driven by
new polymer grades to meet existing and new demand. Following
commissioning and production of first PEEK, we will start to ramp
up and support revenues in early 2024.
Pleasingly, second half operating overheads were down 14%
compared to H1 2023 (and down 9% vs H2 2022), which reflects strong
cost discipline and the impact of no accrual for bonus, as profits
fell.
Going forward, our intention is to ensure investment remains
targeted and to deliver an appropriate return. Operating overheads
are therefore expected to show only limited increases for FY 2024,
including the effect of wage inflation and bonus accrual.
Underlying PBT down on weaker trading environment
Underlying PBT of GBP80.0m was in-line with our revised guidance
and down 16% on the prior year (FY 2022: GBP95.6m).
Reported PBT reduced by 17% to GBP72.5m (FY 2022: GBP87.7m).
This reflects exceptional items of GBP7.5m (FY 2022: GBP7.9m),
representing the cost of implementing a new ERP software system,
the majority of which has been incurred. The implementation will be
substantially completed during 2024.
Earnings per share down 19%
Basic earnings per share (EPS) of 70.9p was 19% down on the
prior year (FY 2022: 87.6p per share), reflecting the decline in
PBT. Underlying EPS was down 18% at 77.7p (FY 2022: 95.0p).
Taxation
Victrex continued to benefit from the reduced tax rate on
profits taxed under the UK Government's Patent Box scheme, which
incentivises innovation and consequently highly skilled Research
& Development jobs within the UK. Net taxation paid was GBP2.0m
(FY 2022: tax paid of GBP10.6m), with the effective tax rate of
15.9% (FY 2022: 13.9%), being slightly higher due to the increase
in UK corporation tax and a lower proportion of profits being
eligible for the patent box rate. Our mid-term guidance for an
effective tax rate has slightly increased to approximately 13%-17%
primarily reflecting the increase in the UK Corporation tax rate
from 19% to 25% from 1 April 2023. We continue to monitor global
taxation developments.
Strong balance sheet
With a range of global customers across our end-markets,
customers recognise and value our strong balance sheet, and our
ability to invest and support security of supply. Net assets at 30
September 2023 totalled GBP501.0m (FY 2022: GBP490.6m).
Return on capital employed (ROCE) and return on sales (ROS) are
focus areas for the Group. After a period of investment in people,
capability and assets, we have the opportunity to improve operating
leverage. Return on sales is a specific KPI we are seeking to
improve, having reduced to 26% in FY 2023 (FY 2022: 28%).
Inventory higher due to softer demand; opportunity for
unwind
For FY 2023, we were required to rebuild raw material
inventories to safety stock levels, to support security of supply
for customers. Several raw materials had run below or close to
safety stock levels during the pandemic, with supply chains
impacted. During the year, we also built inventory to reflect
planned engineering work in H1 2024, which is required as part of
our UK Asset Improvement programme and asset shutdowns.
With the weaker trading environment persisting during the second
half, total closing inventory was higher than expectations at
GBP134.5m (FY 2022: GBP86.8m), which also includes the impact of
higher energy and raw material costs. Upon completion of our UK
Asset Improvement programme in early 2024, we have the opportunity
to start unwinding inventory over the next 1-2 years.
First PEEK in China; commercial ramp-up in FY 2024
With commissioning concluding, including the successful
production of first PEEK prior to commercial start-up, we will be
ramping up commercial production from early 2024. The China
facility, PVYX, will enable us to broaden our portfolio of PEEK
grades, including a new Elementary type 2 PEEK grade, as well as
target a number of key end-markets, particularly Automotive,
Electronics and VAR. Close collaboration with customers continues,
in support of their own growth plans in China. We also invested in
some additional capability within China to support customers, for
example in compounding. With a strong sales and supply chain team,
our technical centre in Shanghai, and our new manufacturing assets,
we are underpinning our future growth.
Capital expenditure set to reduce
Growth investment remains the priority, with cash capital
investment during the year of GBP38.5m (FY 2022: GBP45.5m), of
which a significant proportion was to support our China
manufacturing investments. A large proportion of the China
investment was funded through utilisation of the Group's China
banking facilities.
Other investments included our UK Asset Improvement programme
(we anticipate this will be approximately GBP15m in total, with
most spend already completed and a further GBP5m in FY 2024). This
UK investment will support increased capacity due to batch sizes
and faster cycle times, offering a total nameplate capacity in
excess of 8,000 tonnes (approximately 1,000 tonnes of additional
capacity gained from this investment). This supports growth for the
years ahead and is particularly key in engagement with major OEMs
for high volume opportunities in Aerospace, Automotive and the
Magma programme.
After conclusion of these investments, we see a limited need for
sizeable polymer capacity in the medium term, which will drive
lower capital expenditure. Overall capital expenditure for FY 2024
is expected to be approximately GBP30m-GBP35m, or 8-10% of
revenues. Over the medium term, this will include increased ESG
related capital investment in our manufacturing facilities, to
support decarbonisation. Current ESG related capital expenditure
remains relatively small and is primarily for our Continuous
Improvement (CI) activities. Our increased capacity is expected to
enhance asset efficiency.
Cashflow
Cash generated from operations was GBP42.9m (FY 2022: GBP90.7m),
giving an operating cash conversion(1) of 18% (FY 2022: 49%). This
was driven by the weaker trading environment and increased
inventory. We expect to see an improvement on operating cash
conversion in FY 2024.
Cash and other financial assets at 30 September 2023 was
GBP33.5m (FY 2022: GBP68.8m). This lower cash position reflects
weaker demand and capital expenditure. It also includes GBP3.4m
ring-fenced in our China subsidiaries (FY 2022: GBP2.8m) and other
financial assets of GBP0.1m, representing cash which was held in
deposit accounts greater than three months in duration (FY 2022:
GBP10.1m). With utilisation of the Group's China bank facilities -
put in place for the period of investment in new China
manufacturing assets - borrowings (current and non-current) at 30
September 2023 were GBP39.7m (FY 2022: GBP22.5m).
In Bond 3D, which is making good progress in porous PEEK spinal
cages for medical, with regulatory approval planned in FY 2024, we
committed a further GBP2.9m in convertible loan notes during the
year. This takes the total carrying value of assets in Bond 3D to
GBP18.8m (FY 2022: GBP17.0m). Further investment is required to
complete the development phase and fund through to cash break-even,
with the Bond board targeting new investors during 2024.
In February 2023 we paid the 2022 full year final dividend of
46.14p/share at a cash cost of GBP40.1m and in July 2023 paid the
interim dividend of 13.42p/share at a cash cost of GBP11.7m. After
the year end, the Group renewed its UK banking facilities,
increasing the level of facilities to GBP60m (GBP40m committed and
GBP20m accordion) to reflect higher inventory and provide support
against the current weaker trading environment. The facility
expires in October 2026.
Dividends
Despite the weaker trading environment during the year, the
Board is proposing to maintain the final dividend at 46.14p/share
(FY 2022: 46.14p/share), which reflects the Group being well placed
for a macro-economic recovery. Underlying dividend cover (1) was
1.3x (FY 2022: 1.6x). The Group intends to grow the regular
dividend in line with earnings growth once dividend cover returns
closer to 2x.
Capital allocation; share buybacks a consideration, alongside
special dividends
Whilst growth investment remains the focus for the Group, we
note the income attractions of Victrex, with a cash generative
business model. We continue to review a number of potential
investment opportunities, particularly in Medical as we see
significant opportunities to enhance our portfolio. Following
engagement with shareholders during the year, share buybacks are
now included as an option for future shareholder returns, alongside
special dividends, within our capital allocation policy. Reflecting
the liquidity of Victrex shares, any future buyback programme is
likely to require a lower cash level than that required for special
dividends. Current cash resources would not support a sufficient
buyback programme at this time, although we note the prospect of
improving cashflows as capital expenditure reduces and inventory
levels come down.
Sustainability
Victrex's Sustainability credentials are strong as part of our
'People, Planet and Products' agenda. During the year we saw
sustainable product revenues increase to 55%(2) (FY 2022: 48%). At
the end of FY 2023, we concluded our SBTi submission, aligning our
goals with Science Based Targets across scope 1, 2 and 3 and a
range of decarbonisation options available for us. Post review and
validation by SBTi, we expect to communicate exact reduction
targets during FY 2024, which will be equivalent to an annualised
reduction of approximately 4% to 2050.
FY 2024: Sustainable Solutions & Medical
Following the retirement of our Chief Commercial Officer, Martin
Court, we are further enhancing our focus on delivering growth
through the creation of our Sustainable Solutions (formerly
Industrial) and Medical business areas for FY 2024 onwards. These
will be led by Managing Directors Michael Koch and John Devine
respectively. The re-positioning of Industrial to Sustainable
Solutions has been driven by how we are increasingly demonstrating
the technical, environmental or societal benefits our products
bring to customers.
Mid-term growth targets
Our new mid-term core growth targets 5-7% CAGR on revenue in the
five year period of our strategic plan. This is broadly in line
with our performance on sales volume since 2015 (excluding Consumer
Electronics). These targets reflect the opportunity from a
macro-economic recovery in our core business, with the ability to
grow faster than the wider market through new and differentiated
applications, including growth in China. As our mega-programmes
further increase their commercialisation - whilst noting growth
rates will be influenced by the timing of milestones achieved and
the adoption pathway - we see upside potential towards double-digit
growth (8-10%) . With improved operating leverage and more modest
investment expected, PBT has the opportunity to grow faster than
revenue.
We are also targeting GBP25m-GBP35m of revenues from
mega-programmes in FY 2025 (current mega-programme revenues of
GBP11m, which excludes GBP6m of Gears revenue).
Outlook - a slow start but well placed for recovery &
growth
The Group is expecting good progress in revenue and PBT for FY
2024, subject to an improving macro-economic outlook. Volumes have
the potential for double-digit growth although, at this early
stage, we have yet to see signs of a macro recovery, with a slow
start to our typically seasonally weak Q1. Consequently, growth is
expected to be second half weighted, which is consistent with some
end-market indicators pointing to improvement during 2024. Demand
continues to be soft in Electronics, Energy & Industrial and
VAR. Automotive and Aerospace remain positive, with Medical also
expected to deliver full year growth.
Input costs are tracking lower year-on-year, although there
remains the potential for energy volatility. Within operating
overheads, we expect only limited increases, despite wage inflation
and bonus accrual. However, the effect of lower asset utilisation
and start-up costs in China will have some effect on our cost of
manufacture and gross margin. In relation to currency, whilst spot
rates imply a headwind, our hedging will offset this impact to
PBT.
Overall, the Group is well placed for recovery and growth. With
a strong and diversified core business, increasing
commercialisation in our mega-programmes, well invested assets and
incremental capacity, and the opportunity for cashflow improvement,
our investment proposition remains strong.
Jakob Sigurdsson
Chief Executive, 5 December 2023
(1) Alternative performance measures are defined in note 16
(2) Other internal metrics are defined below
DIVISIONAL REVIEW
Sustainable Solutions (formerly Industrial)
12 Months 12
Months
Ended Ended %
30 Sep 30 Sep % Change
2023 2022 Change (constant
GBPm GBPm (reported) currency)
-------------- ---------- -------- ----------- ----------
Revenue 241.8 282.7 -14% -17%
Gross profit 110.5 124.8 -11% -14%
-------------- ---------- -------- ----------- ----------
Victrex's divisional performance is reported through Sustainable
Solutions (formerly Industrial) and Medical. The Group continues to
provide an end-market based summary of our performance and growth
opportunities. Within Sustainable Solutions end-markets, we have
the Energy & Industrial, Value Added Resellers (VAR), Transport
(Automotive & Aerospace) and Electronics.
A summary of all the mega-programmes and the strong progress
made during the year, is covered earlier in this report.
Weaker end markets driving revenue down 14%
The Sustainable Solutions division saw revenue of GBP241.8m (FY
2022: GBP282.7m), down 14% on the prior year, with a decline across
Electronics, Energy & Industrial and VAR, as these end markets
remain weak. Revenue in constant currency was down 17%. With
improved pricing and a more favourable sales mix, gross margin was
up by 160bps to 45.7% (FY 2022: 44.1%).
Energy & Industrial
Energy & Industrial sees our materials used in a range of
energy applications where Victrex(TM) PEEK has a long-standing
track record of durability and performance benefit in many
demanding Oil & Gas applications. Sales volume of 639 tonnes,
was down 23% on the prior year (FY 2022: 830 tonnes), reflecting
the weaker performance across this area, which is currently a
challenging end-market. Industrial (which makes up more than half
of this segment) is driven by global activity levels and capital
goods equipment, which was weaker during the period.
Elsewhere in the new energy space, we continue to assess
applications in Hydrogen, where PEEK's inert nature and durability
could have a strong play. In Wind, we have gained business on wind
energy applications supporting durability in harsh environments.
Energy volumes overall were down 19%.
Value Added Resellers (VAR)
Victrex has significant business through VAR, much of which is
specified by end users. End market alignment, whilst difficult to
fully track, supports a similar alignment to our Sustainable
Solutions end-markets, with the exception of Aerospace, where sales
volumes are largely direct to OEMs or tier suppliers. VAR is often
a good barometer of the general health of the supply chain, with
VAR customers processing high volumes of PEEK into stock shapes, or
compounds.
After a strong period of growth and a strong comparative, VAR
saw a particularly challenging year, leading to a 39% decline in
VAR volumes, to 1,304 tonnes (FY 2022: 2,122 tonnes). Destocking
was a key contributor in VAR volumes falling significantly this
year, as supply chains adjusted to weaker demand, continuing the
volatility in order patterns seen since the start of the pandemic.
Although visibility remains low, we are well placed for when the
global economic environment improves, with VAR typically seeing a
strong bounce back as demand improves and restocking commences.
Transport (Automotive & Aerospace)
Our Transport area builds on both legacy applications and new
applications with the use of composites or new innovative materials
in aircraft and electric vehicles. We continue to have a strong
alignment to the CO2 reduction megatrend, with our materials
offering lightweighting, durability, comfort, dielectric properties
and heat resistance. As well as long standing core business within
Automotive & Aerospace across a range of application areas, we
also made good progress in our Transport related mega-programmes of
E-mobility and Aerospace Composites.
Overall Transport sales volume was up 4% to 950 tonnes (FY 2022:
913 tonnes), with Aerospace up 20% and Automotive flat (Automotive
revenue up 9%).
Automotive
In Automotive, supply chains continue to impact growth, although
we note market indicators support a return to modest car production
growth in 2024, with S&P forecasting a 1-3% increase in car
production (S&P October 2023). Core applications include
braking systems, bushings & bearings and transmission
equipment, with increasing opportunities and new business wins in
electric vehicles, supporting a growing E-mobility business.
Translation across internal combustion engine (ICE) to electric
vehicles (EVs) remains a net benefit opportunity, with current PEEK
content averaging around 10g per car. Our assessment of the EV
opportunity is now for a long term potential of over 200g per
electric vehicle, with several application areas.
We also gained some new gear business in the e-bike market
during the year, which is expected to grow.
Aerospace
Aerospace volumes were up 20%, reflecting the benefit of plane
build increasing during the year and new application growth.
Application growth includes in Aptiv(TM) film and also our AE(TM)
250 PEEK grade (and use as composite tape). Emerging areas of
business include the potential from PEEK's inert characteristics
within fuel systems, including sustainable fuels. Our
mega-programmes in Aerospace were consolidated into one programme
of Aerospace Composites to simplify and focus resources. Aerospace
Composites supports smaller and larger structural parts for Airbus,
Boeing and tier companies, with qualifications well advanced,
existing parts on planes and larger demonstrator parts being
exhibited by major customers, ahead of commercial adoption.
FY 2023 also saw applications with COMAC start to yield growing
revenue. Whilst relatively small at this stage (based on plane
build of approximately two planes per month) we note the planned
ramp up of production over the coming years.
The mid-term outlook for Aerospace is good. We continue to
consider future plane build forecasts, with our assessment that
over 53 million tonnes of CO2 could be saved over the next 15 years
if all new single aisle planes were produced with over 50% PEEK
composite content.
Electronics
2023 was a tough year for the global Semiconductor market and
Consumer Electronics. Volumes into Semiconductor typically make up
close to half of our Electronics exposure. Total Electronics
volumes were down 23% at 513 tonnes (FY 2022: 662 tonnes), though
we note industry forecasts suggesting an improvement in 2024 for
Semiconductor of 11.8% (WSTS October 2023).
Victrex has historic business in this end market, for core
applications like CMP rings (for Semiconductor), as well as new
applications utilising PEEK, including for Semiconductor, 5G, cloud
computing and other extended application areas. Our Aptiv (TM) film
business and small space acoustic applications remain well
positioned, though consumer devices was an area significantly
impacted by the global downturn.
Home appliances has been an area of growth in recent years and
our impeller application business in high-end brands continues to
offer good growth opportunities. These applications, with lighter
materials and enhanced durability, also offer the opportunity for
improved energy efficiency.
Regional trends
With a more challenging global macro-economic environment,
regional performance in Europe and North America was adversely
affected, with North America being the most impacted.
Overall by region. Europe was down 25%, at 1,903 tonnes (FY
2022: 2,554 tonnes), driven by declines in Energy & Industrial
and VAR primarily. North America was down 32% at 650 tonnes (FY
2022: 952 tonnes), principally driven by Energy & Industrial.
Asia-Pacific was down 14% at 1,045 tonnes (FY 2022: 1,221 tonnes),
as we saw declines in Electronics and VAR.
Medical
12 Months 12
Months
Ended Ended %
30 Sep 30 Sep % Change
2023 2022 Change (constant
GBPm GBPm (reported) currency)
-------------- ---------- -------- ----------- ----------
Revenue 65.2 58.3 +12% +7%
Gross profit 52.1 49.7 +5% +2%
-------------- ---------- -------- ----------- ----------
Our strategy of Polymer & Parts also includes a goal of
increasing the proportion of Medical revenues for the Group, above
one-third of revenues by 2032 from a baseline year of FY 2022 (FY
2023 had Medical share of Group revenue at 21% vs FY 2022 at 17% of
Group revenue). As a high value segment, this end market is seeing
a broader range of opportunities to meet patient and surgeon
requirements, as PEEK's performance supports improved patient
outcomes. To date, over 15 million patients have PEEK implanted
devices.
Medical saw a record performance in FY 2023, driven by further
recovery of elective surgeries post pandemic, and new application
growth. Revenue in Medical was up 12% at GBP65.2m (FY 2022:
GBP58.3m). In constant currency, Medical revenue was up 7%.
Gross profit was GBP52.1m (FY 2022: GBP49.7m) and gross margin
was slightly lower at 79.9% (FY 2022: 85.2%) primarily reflecting
sales mix and the higher growth in non-Spine. We continue to see
faster growth in non-Spine as we purposely target emerging or
developing application areas in Cardio, Drug Delivery and Active
Implantables. Geographically, Asia-Pacific revenues were up 31%
year on year, with Medical revenues in the US up 4% and Europe up
9%.
Progress on the Medical mega-programmes is covered in the
operating review.
Medical strategy
Our Medical aspirations are for our solutions to treat a patient
every 15-20 seconds by 2027 (from approximately 25-30 seconds now)
and the Group is prioritising targeted investment in Medical,
including a New Product Development Centre of Excellence in Leeds,
UK, which opened during the year. This facility will support
customer scale up in Trauma and Knee, aligned to major medical
device companies, as well as working closely with academia. It was
one of the key overhead investment items in FY 2023, as we build
additional capability and skills in this area, with approximately
25 new roles initially.
Our Medical manufacturing capability is already strong in
driving innovation for our parts businesses. As we focus on scale
up, we have established a manufacturing partner for Trauma plates,
Paragon Medical (Paragon), in China, whilst retaining the design
and development know-how. Paragon, who are contracted by many of
the major global medical device companies, will help us to meet the
initial excess demand. Our customer base is growing in this area,
with additional development agreements now in place.
Spine and non-Spine
Non-Spine offers the highest growth area for our core business
over the medium term. Several application areas have seen good
growth, including Arthroscopy and Cranio Maxillo-Facial (CMF). CMF
also offers us an opportunity through 3D printed parts, with new
product grades introduced in this area, driving growth of 38% this
year.
Our current revenue split shows 46% of segmental revenue from
Spine and 54% non-Spine. Next generation Spine products will be key
in maintaining PEEK's position in this segment, including the
opportunity for Porous PEEK, where a spinal cage can support
bone-in growth as well as bone-on growth. A US 510k submission is
targeted during FY 2024. Whilst we continue to innovate and develop
new products for Spine, partly through our associate investment in
Bond 3D, usage of 3D printed titanium cages continues, largely in
the US. PEEK within Spinal fusion remains strong in Asia and
Europe. In China, we are mindful of both the opportunities and
risks from the emerging volume-based procurement (VBP) approach,
The first VBP cycle for Spine occurred during FY 2023 with the
cycle for some other applications expected during FY 2024 . Our
premium and differentiated PEEK-OPTIMA(TM) HA Enhanced product
(POHAE) - to drive next generation Spine procedures - is one part
of our strategy, alongside the introduction of Porous PEEK, to grow
our Medical business, with annualised revenues being approximately
GBP2m and good opportunities globally, and in Asia
particularly.
Other non-Spine applications include Cardio. More than 250,000
patients have now benefited from PEEK being used in heart pumps,
containing implantable grade PEEK. We also introduced a new
pharmaceutical grade, PC-101, for use in drug delivery devices and
pharmaceutical contact.
Other internal metrics:
In addition to the Alternative performance measures defined in
note 17 there are a number of other internal metrics, which are
used by the Board in evaluating performance, and are referenced in
this report, but do not meet the definition for an APM. The
measures are as follows:
- Sales from New Products as a percentage of Group sales is used
by the Board to measure the success of driving adoption of the new
product pipeline. It measures Group sales generated from certain
mega-programmes, new differentiated polymers and other pipeline
products that were not sold in the prior seven years as a
percentage of total Group sales. This metric has been updated in FY
2023 with the prior year's metric, based on new products not sold
before FY 2014.
- Sustainable revenues as a % of total revenues is calculated as
the % of revenue earned from sustainable products, which are
defined as those which offer a quantifiable environmental or
societal benefit. These are primarily in automotive and aerospace
(supporting CO2 reduction) but also in energy and industrial and
electronics (e.g. wind energy applications, or those which support
energy efficiency) and medical, supporting better patient
outcomes.
Consolidated Income Statement
Year ended Year ended
30 September 30 September
2023 2022
Note GBPm GBPm
------------------------------------------- ------- -------- --------------
Revenue 4 307.0 341.0
Losses on foreign currency
net hedging (7.6) (2.8)
Cost of sales (136.8) (163.7)
------------------------------------------- ------- -------- --------------
Gross profit 4 162.6 174.5
Sales, marketing and administrative
expenses (70.8) (70.3)
Research and development expenses (18.6) (15.7)
------------------------------------------- ------- -------- --------------
Operating profit before exceptional
items 80.7 96.4
Exceptional items 5 (7.5) (7.9)
------------------------------------------- ------- -------- --------------
Operating profit 73.2 88.5
Financial income 1.3 0.5
Finance costs (0.7) (0.3)
Share of loss of associate (1.3) (1.0)
Profit before tax and exceptional
items 80.0 95.6
Exceptional items 5 (7.5) (7.9)
------------------------------------------- ------- -------- --------------
Profit before tax 72.5 87.7
Income tax expense 6 (11.5) (12.2)
Profit for the period 61.0 75.5
Profit/(loss) for the period attributable
to:
Owners of the Company 61.7 76.2
Non-controlling interests (0.7) (0.7)
Earnings per share
Basic 7 70.9p 87.6p
Diluted 7 70.5p 87.3p
------------------------------------------- ------- -------- --------------
Dividends (pence per share)
Interim 13.42 13.42
Final 46.14 46.14
59.56 59.56
------------------------------------------- ------- -------- --------------
A final dividend in respect of FY 2023 of 46.14p per ordinary
share has been recommended by the Directors for approval at the
Annual General Meeting on 9 February 2024.
Consolidated Statement of Comprehensive Income
Year ended Year ended
30 September 30 September
2023 2022
GBPm GBPm
-------------------------------------- -------------- --------------
Profit for the period 61.0 75.5
--------------------------------------- -------------- --------------
Items that will not be reclassified
to profit or loss
Defined benefit pension schemes'
actuarial (losses)/gains (6.9) 0.2
Income tax on items that will
not be reclassified to profit
or loss 1.4 (0.1)
(5.5) 0.1
Items that may be subsequently
reclassified to profit or
loss
Currency translation differences
for foreign operations (10.0) 11.1
Effective portion of changes in
fair value of cash flow hedges 10.0 (19.7)
Net change in fair value of cash
flow hedges
transferred to profit or loss 7.6 2.8
Income tax on items that may be
reclassified to profit or loss (3.4) 3.2
4.2 (2.6)
Total other comprehensive expense
for the period (1.3) (2.5)
--------------------------------------- -------------- --------------
Total comprehensive income for
the period 59.7 73.0
Total comprehensive income/(expense)
for the period attributable to:
Owners of the Company 60.4 73.7
Non-controlling interests (0.7) (0.7)
--------------------------------------- -------------- --------------
Consolidated Balance Sheet
30 September 30 September
2023 2022
Note GBPm GBPm
----------------------------------------- ------ --------------- ---------------
Assets
Non-current assets
Property, plant and equipment 351.2 347.2
Intangible assets 18.7 20.2
Investment in associated undertakings 8 9.1 10.4
Financial assets held at fair value
through profit and loss 9 13.2 10.1
Financial assets at amortised cost 0.6 -
Deferred tax assets 5.6 7.2
Retirement benefit asset 9.7 14.9
----------------------------------------- ------ --------------- ---------------
408.1 410.0
----------------------------------------- ------ --------------- ---------------
Current assets
Inventories 134.5 86.8
Current income tax assets 1.3 7.9
Trade and other receivables 47.2 68.1
Derivative financial instruments 11 2.0 -
Other financial assets 12 0.1 10.1
Cash and cash equivalents 33.4 58.7
218.5 231.6
----------------------------------------- ------ --------------- ---------------
Total assets 626.6 641.6
----------------------------------------- ------ --------------- ---------------
Liabilities
Non-current liabilities
Deferred tax liabilities (34.0) (34.3)
Borrowings 10 (34.5) (21.6)
Long term lease liabilities (8.9) (7.8)
Retirement benefit obligations (2.5) (2.7)
(79.9) (66.4)
----------------------------------------- ------ --------------- ---------------
Current liabilities
Derivative financial instruments 11 (1.8) (19.9)
Borrowings 10 (5.2) (0.9)
Current income tax liabilities (3.0) (2.3)
Trade and other payables (34.1) (59.7)
Current lease liabilities (1.6) (1.8)
----------------------------------------- ------ --------------- ---------------
(45.7) (84.6)
----------------------------------------- ------ --------------- ---------------
Total liabilities (125.6) (151.0)
----------------------------------------- ------ --------------- ---------------
Net assets 501.0 490.6
----------------------------------------- ------ --------------- ---------------
Equity
Share capital 0.9 0.9
Share premium 61.9 61.5
Translation reserve 2.8 12.8
Hedging reserve 0.6 (13.6)
Retained earnings 432.8 427.2
----------------------------------------- ------ --------------- ---------------
Equity attributable to owners of the
Company 499.0 488.8
Non-controlling Interest 13 2.0 1.8
----------------------------------------- ------ --------------- ---------------
Total equity 501.0 490.6
------------------------------------------ ---------------------- ---------------
Consolidated Cash Flow Statement
Year ended Year ended
30 September 30 September
2023 2022
Note GBPm GBPm
------------------------------------------- ------- ------- --------------
Cash flows from operating activities
Cash generated from operations 15 42.9 90.7
Interest received 1.0 0.3
Interest paid (0.2) (0.4)
Net income tax paid (2.0) (10.6)
------------------------------------------- ---------------- --------------
Net cash flow generated from
operating activities 41.7 80.0
------------------------------------------- ---------------- --------------
Cash flows from investing activities
Acquisition of property, plant
and equipment and intangible
assets (38.5) (45.5)
Withdrawal of cash invested for
greater than three months 10.0 27.4
Proceeds from disposal of financial
asset held at fair value through
profit and loss - 4.2
Other loans granted (0.9) -
Loan to associated undertakings (2.9) (2.3)
Net cash flow used in investing
activities (32.3) (16.2)
------------------------------------------- ---------------- --------------
Cash flows from financing activities
Proceeds from issue of ordinary shares
exercised under option 0.4 0.4
Repayment of lease liabilities (2.1) (2.1)
Transactions with non-controlling 2.6 -
interests
Bank borrowings received 19.0 14.5
Bank borrowings repaid (0.9) -
Interest on bank borrowings paid (0.9) -
Dividends paid (51.8) (95.2)
------------------------------------------- ---------------- --------------
Net cash flow used in financing
activities (33.7) (82.4)
------------------------------------------- ---------------- --------------
Net decrease in cash and cash equivalents (24.3) (18.6)
Effect of exchange rate fluctuations
on cash held (1.0) 2.4
Cash and cash equivalents at
beginning of period 58.7 74.9
------------------------------------------- ---------------- --------------
Cash and cash equivalents at
end of period 33.4 58.7
------------------------------------------- ---------------- --------------
Consolidated Statement of Changes in Equity
Share Share Translation Hedging Retained Total Non-controlling
capital premium reserve reserve earnings attributable interest Total
to owners
of parent
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------ --------- --------- ------------ --------- ---------- ------------- ---------------- --------
Equity at 1
October
2022 0.9 61.5 12.8 (13.6) 427.2 488.8 1.8 490.6
------------------ --------- --------- ------------ --------- ---------- ------------- ---------------- --------
Total
comprehensive
income for the
period
Profit for the
period
attributable to
the
parent - - - - 61.7 61.7 - 61.7
Loss for the
period
attributable to
non-controlling
interest - - - - - - (0.7) (0.7)
------------------ --------- --------- ------------ --------- ---------- ------------- ---------------- --------
Other
comprehensive
(expense)/income
Currency
translation
differences for
foreign
operations - - (10.0) - - (10.0) - (10.0)
Effective portion
of
changes in fair
value
of cash flow
hedges - - - 10.0 - 10.0 - 10.0
Net change in
fair value
of cash flow
hedges
transferred to
profit
or loss - - - 7.6 - 7.6 - 7.6
Defined benefit
pension
schemes'
actuarial losses - - - - (6.9) (6.9) - (6.9)
Tax on other
comprehensive
(expense)/income - - - (3.4) 1.4 (2.0) - (2.0)
------------------ --------- --------- ------------ --------- ---------- ------------- ---------------- --------
Total other
comprehensive
(expense)/income
for
the period - - (10.0) 14.2 (5.5) (1.3) - (1.3)
Total
comprehensive
(expense)/income
for
the period - - (10.0) 14.2 56.2 60.4 (0.7) 59.7
Contributions by
and
distributions to
owners
of the Company
Adjustment
arising from
additional
investment
by
non-controlling
interest - - - - - - 0.9 0.9
Share options
exercised - 0.4 - - - 0.4 - 0.4
Equity-settled
share-based
payment
transactions - - - - 1.1 1.1 - 1.1
Tax on
equity-settled
share-based
payment
transactions 0.1 0.1 - 0.1
Dividends to
shareholders - - - - (51.8) (51.8) - (51.8)
------------------ --------- --------- ------------ --------- ---------- ------------- ---------------- --------
Equity at 30
September
2023 0.9 61.9 2.8 0.6 432.8 499.0 2.0 501.0
------------------ --------- --------- ------------ --------- ---------- ------------- ---------------- --------
Share Share Translation Hedging Retained Total Non-controlling
capital premium reserve reserve earnings attributable interest Total
to owners
of parent
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------ -------- --------- ------------ --------- --------- ------------- ---------------- --------
Equity at 1
October
2021 0.9 61.1 1.7 0.1 445.4 509.2 2.5 511.7
------------------ -------- --------- ------------ --------- --------- ------------- ---------------- --------
Total
comprehensive
income for the
year
Profit for the
year
attributable to
the
parent - - - - 76.2 76.2 - 76.2
Loss for the year
attributable
to
non-controlling
interest - - - - - - (0.7) (0.7)
------------------ -------- --------- ------------ --------- --------- ------------- ---------------- --------
Other
comprehensive
income/(expense)
Currency
translation
differences for
foreign
operations - - 11.1 - - 11.1 - 11.1
Effective portion
of
changes in fair
value
of cash flow
hedges - - - (19.7) - (19.7) - (19.7)
Net change in
fair value
of cash flow
hedges
transferred to
profit
or loss - - - 2.8 - 2.8 - 2.8
Defined benefit
pension
schemes'
actuarial gains - - - - 0.2 0.2 - 0.2
Tax on other
comprehensive
income/(expense) - - - 3.2 (0.1) 3.1 - 3.1
------------------ -------- --------- ------------ --------- --------- ------------- ---------------- --------
Total other
comprehensive
income/(expense)
for
the year - - 11.1 (13.7) 0.1 (2.5) - (2.5)
Total
comprehensive
income/(expense)
for
the year - - 11.1 (13.7) 76.3 73.7 (0.7) 73.0
Contributions by
and
distributions to
owners
of the Company
Share options
exercised - 0.4 - - - 0.4 - 0.4
Equity-settled
share-based
payment
transactions - - - - 1.8 1.8 - 1.8
Tax on
equity-settled
share-based
payment
transactions - - - - (1.1) (1.1) - (1.1)
Dividends to
shareholders - - - - (95.2) (95.2) - (95.2)
------------------ -------- --------- ------------ --------- --------- ------------- ---------------- --------
Equity at 30
September
2022 0.9 61.5 12.8 (13.6) 427.2 488.8 1.8 490.6
------------------ -------- --------- ------------ --------- --------- ------------- ---------------- --------
Notes to the Financial Report
1. Reporting entity
Victrex plc (the 'Company') is a public company, which is
limited by shares and is listed on the London Stock Exchange. This
Company is incorporated and domiciled in the United Kingdom. The
address of its registered office is Victrex Technology Centre,
Hillhouse International, Thornton Cleveleys, Lancashire FY5 4QD,
United Kingdom.
The consolidated financial statements of the Company for the
year ended 30 September 2023 comprise the Company and its
subsidiaries (together referred to as the 'Group').
The consolidated financial statements were approved for issue by
the Board of Directors on 5 December 2023.
2. Basis of preparation
Both the consolidated and Company financial statements have been
prepared in accordance with international accounting standards in
conformity with the requirements of the Companies Act 2006 and in
accordance with UK-adopted International Accounting Standards. The
financial statements have been prepared under the historical cost
basis except for derivative financial instruments, defined benefit
pension scheme assets and financial assets held at fair value
through profit and loss, which are measured at their fair
value.
The Group's business activities, together with factors likely to
affect its future development, performance and position, are set
out in the FY 2023 Annual Report. In addition, note 16 (financial
risk management) in the financial statements of the FY 2023 Annual
Report details the Group's exposure to a variety of financial
risks, including currency and credit risk.
The financial information set out in this document does not
constitute the Group's statutory financial statements for the years
ended 30 September 2023 or 2022 but is derived from those financial
statements. Statutory financial statements for the year ended 30
September 2023 and 30 September 2022 have been reported on by the
auditors who issued an unqualified opinion and did not draw
attention to any matters by way of emphasis without qualifying
their report and did not contain statements under s498(2) or
s498(3) of the Companies Act 2006 in respect of both years in the
auditors' reports for FY 2023 and FY 2022. Statutory accounts for
the year ended 30 September 2022 have been filed with the Registrar
of Companies. The statutory accounts for the year ended 30
September 2023, will be delivered to the Registrar of Companies
within the Companies House accounts filing guidance. A separate
announcement will be made when the FY 2023 Annual Report is made
available on the Company's website in January 2024.
Climate change
In preparing the financial statements of the Group an assessment
of the impact of climate change has been made in line with the
requirements of the Task Force on Climate-Related Financial
Disclosures ("TCFD") and with specific consideration of the
disclosures made in the Sustainability report starting on page 42
of the FY 2023 Annual Report. This has specifically incorporated
the impact of the physical risks of climate change, transitional
risks including the potential impact of government and regulatory
actions as well as the Group's stated Net Zero targets. The
potential impact has been considered in the following areas:
- the key areas of judgement and estimation
- the expected useful lives of property, plant and equipment
- those areas which rely on future forecasts which have the
potential to be impacted by climate change:
o carrying value of non-current assets
o going concern
o viability
- the recoverability of deferred taxation assets
- the recoverability of inventory and trade receivables
The Directors recognise the inherent uncertainty in predicting
the impact of climate change and the actions which regulators and
governments, both domestic and overseas, will take in order to
achieve their various targets. However from the work undertaken to
date, outlined in the Sustainability report, the Directors have
reached the overall conclusion that there has been no material
impact on the financial statements for the current year from the
potential impact of climate change.
The Group's analysis on the impact of climate change continues
to evolve as more clarity on timings and targets emerges, with
Victrex committed to reducing its carbon impact towards Net Zero
across all scopes by 2050.
Use of Judgements and estimation uncertainty
The Group uses estimates and assumptions in applying the
critical accounting policies to value balances and transactions
recorded in the financial statements. The estimates and assumptions
that, if revised, would have a significant risk of a material
impact on the valuation of assets and liabilities within the next
financial year are retirement benefits, the valuation of inventory,
the carrying value of the investment in associate and fair value of
convertible loan notes held in Bond 3D High Performance Technology
BV ("Bond") . The latter two were disclosed as "Other areas of
judgement and sources of estimation uncertainty" in FY 2022 Annual
Report. At 31 March 2023 the directors reassessed this resulting in
the reclassification to "critical judgement and key source of
estimation uncertainty". This conclusion was reached in the
knowledge that further investment was required to support Bond
through to net cash generation, the economic environment had
tightened the financing market for early-stage businesses, there
were delays to the delivery of the key milestones and current
funding was only sufficient to sustain Bond through to mid-FY 2024.
The directors therefore concluded there was an increased risk of a
material change to the carrying values of both the investment in
associate and convertible loans in the next 12 months.
Going Concern
The Directors have performed a robust going concern assessment
including a detailed review of the business' 24-month rolling
forecast and consideration of the principal risks faced by the
Group and the Company, as detailed on pages 32 to 38 of the FY 2023
Annual Report. This assessment has paid particular attention to
current trading results and the impact of the current global
economic challenges on the aforementioned forecasts.
The Group maintains a strong balance sheet providing assurance
to key stakeholders, including customers, suppliers and employees.
The combined cash and other financial assets balance at 30
September 2023 was GBP33.5m, having reduced from GBP68.8m at 30
September 2022 following payment of the regular dividends of
GBP40.1m in February 2023 and GBP11.7m in June 2023 and a strategic
increase in the level of inventory held. Of the GBP33.5m, GBP3.4m
is held in the Group's subsidiaries in China for the sole purpose
of funding the construction of our new manufacturing facilities. Of
the remaining GBP30.1m, approximately 70% is held in the UK, on
instant access, where the company incurs the majority of its
expenditure. The Group has drawn debt of GBP31.6m in its Chinese
subsidiaries (with a total facility of c.GBP34.2m available until
December 2026) and has unutilised UK banking facilities, renewed
and extended in October 2023, of GBP60m through to October 2026, of
which GBP40m is committed and immediately available and GBP20m is
available subject to lender approval.
The 24-month forecast is derived from the company's Integrated
Business Planning ("IBP") process which runs monthly. Each area of
the business provides forecasts which consider a number of external
data sources, triangulating with customer conversations, trends in
market and country indices as well forward-looking industry
forecasts. For example, forecast aircraft build rates from the two
major manufacturers for Aerospace, rig count and purchasing manager
indices for E&I, World Semiconductor Trade Statistics
semiconductor market forecasts for Electronics and Needham and
IQVIA forecasts for Medical procedures.
The assessment of going concern included conducting scenario
analysis on the aforementioned forecast which, given current
economic forecasts and sales trends through the financial year
ended 30 September 2023, where volumes dropped 24% year on year and
33% in the second half, exacerbated by rapid customer destocking,
focused on the Group's ability to sustain a further period of
suppressed demand. In assessing the severity of the scenario
analysis the scale and longevity of the impact experienced during
previous economic downturns has been considered, including the
differing impacts on Sustainable Solutions versus Medical
segments.
Using the IBP data and reference points from previous downturns
management has created two scenarios to model the continuing effect
of lower demand at regional/market level and aggregated levels on
the company's profits and cash generation through to December 2024
with consideration also given to the six months beyond this. The
impact of climate change and the Group's Net Zero 2050 goal (Scope
1, 2 & 3) are considered as part of the aforementioned IBP
process, from both a revenue and cost perspective, with the
anticipated impact (assessed as insignificant over the shorter-term
going concern period) incorporated in the forecasts. As a result
the scenario testing noted below does not incorporate any
additional sensitivity specific to climate change.
During the second half of FY 2023 the drop in sales to a
quarterly run rate of c.830 tonnes reflected the continuation of
the contraction in demand in the global economy, which started in
the first quarter of FY 2023, and also the rapid destocking by
customers as they managed their inventory and had extended
shutdowns. This level of demand is not inconsistent with that seen
during COVID-19 with Q2 and Q4 for 2020 at similar levels and Q3
lower due to global lockdowns. Other than in the current economic
cycle and during COVID-19 demand has not been at this level during
the past decade. With customers now largely destocked the Board
believe the low point of the economic cycle has been reached, and
whilst there are limited signs of a return to growth, demand has
stabilised. As a result the key downside risk is that of an
extended period of subdued demand. The current downturn has been
running for 12 months, already longer than the previous downturns
during COVID-19 and the financial crisis, but with no clear signs
of recovery, the Board has considered the impact of reduced demand,
in line with the lowest quarter of the previous year, Q3, for a
further 6 months (scenario 1) and a further 12 months (scenario 2).
As noted above, the lower cash balance at 30 September 2023 is,
apart from lower sales volumes, attributable to an increase in the
level of inventory held. Current forecasts assume a gradual
reduction in inventory across FY 2024 and FY 2025 with inventory
providing the opportunity to benefit from market recovery. The
scenarios modelled assume that a more aggressive inventory unwind
approach is taken to mitigate the ongoing lower cash generation
from subdued volumes.
Scenario 1 - the global economy remains subdued through the
first half of FY 2024 with demand in line with the low point in FY
2023, quarter 3, before a slow recovery in the second half of FY
2024. The demand then increases modestly through the second half to
c.1,900 tonnes before further modest growth for the remainder of
the going concern period. Medical revenue remains in line with that
seen during the past 12 months run rate, with the economic
situation historically having minimal impact on this segment, in
line with the experience of the past 12 months. Inventory is
reduced in line with sales.
Scenario 2 - in line with scenario 1 through the first half of
FY 2024, with this lower demand continuing for a further 12 months,
i.e. throughout the going concern period, taking the total period
of lower demand to in excess of 24 months, well above the duration
of any previous downturn experienced by the company. This would
give an annual volume below c.3,300 tonnes, a level not seen since
2013. In this scenario Medical revenue is reduced by 10% during the
second six months to reflect a limited impact from a longer lasting
slowdown. With the period of prolonged lower demand, a more
aggressive unwind of the inventory balance has been assumed.
Inventory is reduced in line with sales. The Group considers
scenario 2 to be a severe but plausible scenario.
Commercial sales from the new PEEK manufacturing facility in
China are expected in early 2024, a consequence of which is that
the entity will require additional funding to see it through to net
cash generation. In concluding on the going concern position, it
has been assumed that Victrex will provide the additional funds in
full, which the board consider to be the worst case scenario.
Before any mitigating actions the sensitised cash flows show the
company has significantly reduced cash headroom, which would
require use of the committed facility during the going concern
period. The level of facility drawn down is higher in Scenario 2
but in neither scenario is the committed facility fully drawn, nor
drawn for the whole year. With cash levels lower than has
historically been the case for Victrex, the company has identified
a number of mitigating actions which are readily available to
increase the headroom. These include:
- Use of committed facility - GBP40m could be drawn at short
notice. Conversations with our banking partners indicate that the
GBP20m uncommitted accordion could also be readily accessed. The
covenants of the facility have been successfully tested under each
of the scenarios;
- Deferral of capital expenditure - the base case capital
investment over the next 12 months is lower than recent years at
approximately GBP30-GBP35m with major projects completed in China
and the UK. This could be reduced significantly by limiting
expenditure to essential projects, deferring all other projects
later into 2025 or beyond;
- Reduction in discretionary overheads - costs would be limited
to prioritise and support customer related activity;
- Reduction in inventory levels - inventory has been increased
to provide additional security during plant shutdowns and to
provide sufficient inventory to respond to a rapid economic
recovery. The scenarios noted above include an acceleration of the
inventory unwind but a more aggressive approach could be taken to
provide additional cash resources; and
- Deferral/cancellation of dividends - the Board considers the
cash position and interests of all stakeholders before recommending
payment of a dividend. A dividend has been proposed for payment in
February 2024 of c.GBP40m and in the past an interim dividend of
c.GBP12m has been paid in June, giving a combined annual outflow of
c.GBP52m.
Reverse stress testing was performed to identify the level that
sales would need to drop by in order for the Group to run out of
cash by the end of the going concern assessment period. Sales
volumes would need to consistently drop materially below the low
point in scenario 2 which is not considered plausible.
As a result of this detailed assessment and with reference to
the company's strong balance sheet, existing committed facilities
and the cash preserving levers at the company's disposal, but also
acknowledging the current economic uncertainty with a number of
global economies close to/in recession, the war in Ukraine
continuing and tensions in the Middle East, the Board has concluded
that the company has sufficient liquidity to meet its obligations
when they fall due for a period of at least 12 months after date of
this report. For this reason, they continue to adopt the going
concern basis for preparing the financial statements.
3. Significant accounting policies
The accounting policies applied by the Group in these condensed
financial statements are the same as those applied in the Group's
2022 Annual Report and Financial Statements except for the
application of relevant new standards. None of the new standards
have had a material impact on the Group's consolidated result or
financial position.
4. Segment reporting
The Group's business is strategically organised as two business
units (operating segments): Sustainable Solutions (formerly
Industrial), which focuses on our Energy & Industrial, VAR,
Transport and Electronics markets, and Medical, which focuses on
providing specialist solutions for medical device
manufacturers.
Year ended 30 September Year ended 30 September
2023 2022
--------------------------------------------- ------------------------------
Sustainable Medical Sustainable Medical
Solutions Group Solutions Group
GBPm GBPm GBPm GBPm GBPm GBPm
----------------------- ---------------- -------------- ---------- ------------ -------- ------
Segment revenue 250.3 65.2 315.5 285.8 58.3 344.1
Internal revenue (8.5) - (8.5) (3.1) - (3.1)
------------------------ ---------------- -------------- ---------- ------------ -------- ------
Revenue from external
sales 241.8 65.2 307.0 282.7 58.3 341.0
------------------------ ---------------- -------------- ---------- ------------ -------- ------
Segment gross profit 110.5 52.1 162.6 124.8 49.7 174.5
5. Exceptional items
Items that are, in aggregate, material in size and/or unusual or
infrequent in nature, are included within operating profit and
disclosed separately as exceptional items in the Consolidated
Income Statement.
The separate reporting of exceptional items, which are presented
as exceptional within the relevant category in the Consolidated
Income Statement, helps provide an indication of the underlying
performance of the Group.
Year ended Year ended
30 September 2023 30 September
GBPm 2022
GBPm
------------------------------------------------------------- --------------
Included within sales, marketing and administrative
expenses
Implementation of SaaS ERP system 7.5 7.9
Exceptional items before tax 7.5 7.9
------------------------------------------------------ ------ --------------
Tax on exceptional items (1.7) (1.5)
------------------------------------------------------ ------ --------------
Exceptional items after tax 5.8 6.4
------------------------------------------------------ ------ --------------
Implementation of SaaS ERP system
During FY 2022 the Group commenced a multi-year implementation
of a new cloud-based ERP system. The implementation costs treated
as exceptional include process redesign, customisation and
configuration of the system, change management and training, which
will deliver benefits to both customer interactions and internal
business processes.
The new ERP system does not meet the criteria for capitalisation
(as the majority of costs relating to past systems have), in line
with the IFRS Interpretations Committee's decision clarifying how
arrangements in respect of cloud based software as a service (SaaS)
systems should be accounted for. Accordingly, the cost is expensed
rather than capitalised and amortised. Given the size of the
project and its impact on the reported profit-based metrics, the
fact the system is evergreen and thus this level and nature of cost
will not happen again, it meets the Group's criteria to be
presented as exceptional. The ERP system is expected to be
substantially complete in 2024.
The cash flow in the year associated with exceptional items was
a GBP7.6m outflow (FY 2022: GBP5.6m outflow).
6. Income tax expense
Year ended Year ended
30 September 30 September
2023 2022
GBPm GBPm
--------------------------------------- -------------- --------------
UK corporation tax 5.5 9.0
Overseas tax 2.5 2.4
Deferred tax 3.2 1.7
Tax adjustments relating to prior
years 0.3 (0.9)
Total tax expense in income statement 11.5 12.2
--------------------------------------- -------------- --------------
Effective tax rate 15.9% 13.9%
--------------------------------------- -------------- --------------
Deferred tax assets/liabilities have been recognised at the rate
they are expected to reverse. For UK assets/liabilities this is 25%
for the majority of assets and liabilities (30 September 2022:
25%), being the UK tax rate effective from 1 April 2023. For
overseas assets/liabilities the corresponding overseas tax rate has
been applied.
7. Earnings per share
Year ended Year ended
30 September 30 September
2023 2022
-------------------------------------------------- -------------- --------------
Earnings
per share - basic 70.9p 87.6p
- diluted 70.5p 87.3p
--------------- -------------- --------------
Profit for the financial period attributable
to the owners of the company (GBPm) 61.7 76.2
-------------------------------------------------- -------------- --------------
Weighted average number
of shares used - basic 86,937,187 86,897,353
- diluted 87,496,409 87,239,312
---------------------------------- -------------- -------------- --------------
8. Investment in associated undertakings
Bond 3D High Performance Technology BV ("Bond")
Bond is a company incorporated in the Netherlands, developing
unique, protectable 3D printing (Additive Manufacturing) processes
which are capable of producing high strength parts from existing
grades of PEEK and PAEK polymers. The investment offers the
potential of utilising this technology to help accelerate the
market adoption of 3D printed PEEK parts, with particular emphasis
on the Medical market.
The total carrying value of assets held with Bond as at 30
September 2023 is GBP18.8m (30 September 2022: GBP17.0m),
comprising investment in associate of GBP9.1m (30 September 2022:
GBP10.4m) and convertible loan notes of GBP9.7m (30 September 2022:
GBP6.6m).
Investment in associate
The Group's investment in the ordinary share capital of Bond at
30 September 2023 is EUR14.7m/GBP12.9m (24.5%) at cost (30
September 2022: same), with a carrying value of GBP9.1m (30
September 2022: GBP10.4m) which includes the impact of the Group's
share of losses since investment. Bond's share capital consists
solely of ordinary shares. For the year to 30 September 2023 the
Group's share of Bond's losses was GBP1.3m (30 September 2022:
GBP1.0m). As the Group is considered to have significant influence,
but not control, in Bond, the investment continues to be accounted
for as an associate using the equity method with the investment
being held at cost less post-acquisition losses and subject to
impairment.
Convertible loan notes (CLA's) due from Bond
The Group has also been providing regular cash injections to
Bond in the form of CLAs. The CLAs are convertible into ordinary
shares of Bond, at the Group's option, or are to be repaid by Bond
on or before the end of the five-year agreed term. The majority of
the CLAs accrue interest which is accumulated into the value of the
CLA and attracts the same conversion rights as the principal. The
CLAs have preferential treatment to the ordinary equity in an exit
scenario.
The convertible loan notes due from Bond as at 30 September 2023
are as follows:
Convertible As at As at
loan Interest 1 October Interest CLA Currency 30 September
note agreements rate Principal 2022 accrued drawdown movement 2023
% EURm EURm EURm EURm EURm EURm
----------------- -------- --------- ---------- -------- --------- --------- -------------
CLA 1 3.0 0.3 0.3 - - - 0.3
2020 CLA N/A 2.0 2.0 - - - 2.0
2021 CLA 6.0 6.7 5.1 0.4 1.9 - 7.4
2023 CLA 6.0 3.1 - - 1.5 - 1.5
----------------- -------- --------- ---------- -------- --------- --------- -------------
Total (EURm) 7.4 0.4 3.4 - 11.2
----------------- -------- --------- ---------- -------- --------- --------- -------------
Total (GBPm) 6.6 0.4 2.9 (0.2) 9.7
----------------- -------- --------- ---------- -------- --------- --------- -------------
Under the 2023 CLA a further EUR1.6m will be advanced to Bond,
subject to the satisfactory completion of pre-determined
milestones, which are expected to be completed during FY 2024.
If all the CLA's are fully converted to equity, including the
accumulated interest, Victrex's ownership interest will increase to
45.5%.
The CLA's in Bond do not meet the criteria to be classified as
amortised cost nor FVTOCI, as the cash flows are not solely
payments of principal and interest due to the existence of
conversion rights and are therefore classified as FVTPL. The
transaction value is considered materially equal to the fair value
of the convertible loan for initial recognition.
In the absence of an arm's length transaction in the equity of
Bond there remains a lack of observable market inputs for
subsequent fair value assessments which results in the instrument
continuing to be classified as Level 3. No gains or losses on the
valuation of the CLA's have been recognised in the year (FY 2022 -
same). The use of unobservable inputs in measuring fair value is
disclosed below.
Critical judgements and key sources of estimation uncertainty in
relation to the carrying value of investment in associate in Bond
and fair value of convertible loan notes due from Bond
The carrying value of investment in associate in Bond and the
fair value of convertible loan notes due from Bond (together the
"assets in Bond") both require the use of judgement and estimates.
While the basis of measurement for each is different, as noted
above, given the relative immaturity of Bond, both assessments are
dependent on the delivery of the company's strategy and the
inherent uncertainties therein.
The clearest evidence of carrying value of the assets in Bond
would be an arm's length transaction in the equity of Bond,
however, due to the market conditions and the Bond board's decision
to obtain additional funding from existing shareholders until the
perceived risk in the company has reduced following delivery of key
milestones, no such evidence exists.
In the absence of this evidence and a lack of other observable
market inputs the assessment is based on the future forecasts for
the business with the application of a number of scenarios to
provide a range of potential outcomes which are used to both assess
for indicators of impairment of the associate and to determine the
range of fair values for the convertible loan notes. In making this
assessment the status of each of the key milestones identified as
driving the business valuation has been considered. Assumptions on
the discount rate have also been considered in determining the
business valuation range.
The delivery of the strategy relies on key milestones being met
in the optimisation of the technology, regulatory approval being
obtained from the relevant medical authority for the resulting
products and successful commercialisation. The CLA 2023 funding is
sufficient to fund the business through to mid-FY 2024 at which
point additional funding is required to deliver the strategy. Work
on delivering these milestones was in progress at the 30 September
2023, with the outcome not necessarily being clear until early in
2024, or later for the successful commercialisation. The current
funding market for early stage technology companies remains
difficult, and therefore assessing the fair value of Bond, along
with any impact on the carrying value of Victrex's investment,
requires significant judgement and estimation.
Using the Bond strategic plan and forecast, the Board of Bond
has developed a business valuation based on discounting future cash
flows. The valuation takes into account the risks in the delivery
of the plan and includes a number of unobservable input assumptions
that market participants would use when valuing the business,
including, for example, the total addressable market, level of
market penetration achievable and industry growth rates.
Management has assessed a range of possible outcomes around the
Bond business valuation by varying key inputs, which will have the
largest impact on the valuation over the next 12 months, including
a delay to achieving the technology optimisation required to make
the products commercially viable and a delay to obtaining
regulatory approval, a delay to the growth in sales forecast, an
increase in the discount rate applied and a reduction in the
assumed terminal growth rate.
A range of potential outcomes is illustrated below noting that
additional funding is required by mid-FY 2024 across all
scenarios:
- Scenario 1 - The strategy is delivered in full which based on
the strategic forecasts would value the business is excess of the
current carrying value resulting in an increase in the fair value
of the convertible loan notes
- Scenario 2 - The strategy is delivered, but with a two year
delay and the discount rate increased from 12% to 14%. This two
year delay covers milestone delivery delays and sensitivity of the
unobservable market inputs noted above. In this scenario the
valuation is materially in line with the current carrying value of
the assets in Bond
- Scenario 3 - Bond is able to gain additional funding but, due
to delays in executing its strategy or other factors, the valuation
of the company is such that existing shareholders are significantly
diluted or exit at a loss. The protections associated with the
convertible loan notes, which have preference on exit over equity,
mean that this balance is recoverable at carrying value (GBP9.7m)
but an impairment of the investment in associate of up to GBP9.1m
is required.
- Scenario 4 - The technology is superseded and does not make it
to market or further external funding cannot be obtained and the
existing shareholders decide not to continue funding, which with
minimal saleable assets, would result in the assets in Bond having
little or no value, incurring a write down for the Company of up to
GBP18.8m, considered to be the worst case outcome.
The analysis performed by the Board illustrates a wide range of
potential outcomes, which is not uncommon given the relative
immaturity of Bond and its current stage of development. It is
likely to be a longer time period, in the absence of an arm's
length equity transaction, before the range of outcomes can be
reduced to such an extent that a fair value which is different to
the initial fair value can be established with a sufficient degree
of reliability. Therefore, cost is considered to be the best
estimate of fair value, sitting with the range of possible
outcomes, in line with the criteria of IFRS 9 - Financial
Instruments.
In undertaking the above analysis, the Directors have considered
whether there is any objective evidence that a loss event (or
events), which would trigger the requirement to perform an
impairment review, as detailed in IAS 28 Investments in Associates
and Joint Ventures, exists at 30 September 2023. The Directors have
concluded that the challenges facing Bond (for example delays,
further funding requirements etc) are typical of experiences in
early stage technology companies and therefore the requirement to
perform an impairment review has not been triggered. The investment
has therefore not been tested for impairment.
9. Financial assets held at fair value through profit and
loss
At 30 September 2023, financial assets held at fair value
through profit and loss relate to:
- Investment in Surface Generation Limited at GBP3.5m (30 September 2022: GBP3.5m)
- Convertible loans in Bond at GBP9.7m (30 September 2022: GBP6.6m). See also note 8 above.
10. Borrowings
As at As at
30 September 30 September
2023 2022
GBPm GBPm
------------------------------------------ -------------- --------------
Due within one year
Bank loans 5.2 0.9
Total due within one year 5.2 0.9
------------------------------------------ -------------- --------------
Due after one year
Bank loans 26.4 14.8
Loan payable to Non-controlling interest 8.1 6.8
------------------------------------------ -------------- --------------
Total due after one year 34.5 21.6
------------------------------------------ -------------- --------------
Bank loans
RMB 44 million (GBP5.1m) of the amount due within one year
relates to the working capital facility in China, which comprises
RMB 50 million of the Group's total facility of RMB 300 million
facility, the remaining RMB 250 million relates to the capital
expenditure facility. Each drawdown under the working capital
facility is required to be repaid at least annually, after which
the balance can be redrawn. Interest is charged at the one-year
Loan Prime Rate of People's Bank of China +50bps and is charged to
the income statement, included within Finance costs. The remaining
RMB 232 million (GBP26.5m, 30 September GBP15.7m), relating to the
capital expenditure facility, is repayable in line with an agreed
schedule up to December 2026, of which GBP0.1m (30 September 2022:
GBP0.9m) is repayable within one year. Interest is charged at the
five-year Loan Prime Rate of People's Bank of China, which has been
in the range of 4.2% - 4.3% in the year ended 30 September 2023.
The purpose of the loan is funding the construction of a
manufacturing facility in China, with the interest payable
capitalised as part of qualifying capital expenditure within
property, plant and equipment. During the year, interest of GBP0.9m
(FY 2022: GBP0.3m) has been capitalised accordingly.
Loan payable to Non-controlling interest
The Group's loan payable to the non-controlling interest is
interest bearing at 4% per annum. Interest payable on the
shareholder loan is rolled up into the value of the loan, until
repayment occurs. The purpose of the shareholder loan is funding
the construction of a manufacturing facility in China, with the
interest payable capitalised as part of qualifying capital
expenditure within property, plant and equipment.
During the year, in line with the shareholder loan agreement, a
loan of RMB 15m (GBP1.7m) was received from the non-controlling
interest in Panjin VYX High Performance Materials Co., Ltd,
Liaoning Xingfu New Material Co., Ltd. ('LX'). This is the second
and final instalment, with the first instalment of RMB 50m
(GBP5.6m) being received in FY 2021. Both instalments are unsecured
and denominated in Chinese Renminbi ('RMB'), and had a combined
Sterling value (including rolled up interest and the impact of
foreign currency movements between the date the loan was received
and the balance sheet date) of GBP8.1m at 30 September 2023 (30
September 2022: GBP6.8m).
The first instalment is repayable on 30 September 2026, with the
second instalment repayable on 30 September 2027, or such date as
may be mutually agreed by the shareholders, LX and Victrex Hong
Kong Limited. During the year, the total interest cost of GBP0.3m
was capitalised into assets under construction (30 September 2022:
GBP0.2m).
11. Derivative financial instruments
The notional contract amount, carrying amount and fair value of
the Group's forward exchange contracts are as follows:
As at 30 September As at 30 September
2023 2022
--------------------- ------------------------ ----------------------
Notional Carrying Notional Carrying
contract amount and contract amount
amount fair value amount and fair
value
GBPm GBPm GBPm GBPm
--------------------- ---------- ------------ ---------- ----------
Current assets 105.5 2.0 - -
Current liabilities 86.7 (1.8) 197.5 (19.9)
---------------------- ---------- ------------ ---------- ----------
192.2 0.2 197.5 (19.9)
--------------------- ---------- ------------ ---------- ----------
The fair values have been calculated by applying (where
relevant), for equivalent maturity profiles, the rate at which
forward currency contracts with the same principal amounts could be
acquired on the balance sheet date. These are categorised as Level
2 within the fair value hierarchy. Fair value losses on foreign
currency contracts of GBP7.6m has been recognised in the period (FY
2022 - losses of GBP2.8m).
12. Other financial assets
At 30 September 2023 the Group had GBP0.1m of cash which was
held in deposit accounts greater than three months in duration (30
September 2022: GBP10.1m). This is included in the Available Cash
metric (see Alternative performance measures in note 16).
13. Non-controlling interest
The non-controlling interest recognised relates to the Group's
subsidiary company, PVYX, where the Group continues to hold a 75%
equity interest with the remaining 25% held by Liaoning Xingfu New
Material Co., Ltd. PVYX is a limited liability company set up for
the purpose of the manufacture of PAEK polymer powder and granules,
based in mainland China. The income statement and balance sheet of
PVYX are fully consolidated with the share owned by LX represented
by a non-controlling interest.
During the current year LX made further cash injections in to
PVYX, totalling RMB 22.5 million (GBP2.6m), split RMB 15 million
(GBP1.7m) in the form of loans (see note 10) and further equity
investment of RMB 7.5 million / GBP0.9m.
In the year to 30 September 2023 the subsidiary incurred a loss
of GBP2.6m (FY 2022: loss of GBP2.9m), of which GBP0.7m (FY 2022:
GBP0.7m) is attributable to the non-controlling interest. Total
non-controlling interest as at 30 September 2023 is GBP2.0m (FY
2022: GBP1.8m).
14. Exchange rates
The most significant Sterling exchange rates used in the
financial statements under the Group's accounting policies are:
Year ended Year ended
30 September 30 September
2023 2022
------------------ ------------------
Average Closing Average Closing
----------- ---- -------- -------- -------- --------
US Dollar 1.16 1.22 1.30 1.10
Euro 1.14 1.16 1.16 1.13
------------------ -------- -------- -------- --------
The average exchange rates in the above table are the weighted
average spot rates applied to foreign currency transactions,
excluding the impact of foreign currency contracts. Gains and
losses on foreign currency contracts, to the point where
transferred to profit or loss, where net hedging has been applied
for cash flow hedges, are separately disclosed in the income
statement.
15. Reconciliation of profit to cash generated from operations
Year ended Year ended
30 September 30 September
2023 2022
GBPm GBPm
--------------------------------------------- --------------
Profit after tax for the year 61.0 75.5
Income tax expense 11.5 12.2
Share of loss of associate 1.3 1.0
Net financing income (0.6) (0.2)
Operating profit 73.2 88.5
Adjustments for:
Depreciation 19.8 19.0
Amortisation 1.7 2.6
Loss on disposal of non-current
assets 0.3 2.4
Gain on early termination of (0.2) -
long-term lease liabilities
Equity-settled share-based payment
transactions 1.1 1.8
(Gains)/losses on derivatives
recognised in income statement
that have not yet settled (2.5) 4.0
Losses/(gains) on financial
asset held at fair value 0.2 (0.3)
Increase in inventories (50.7) (13.4)
Decrease/(increase) in trade
and other receivables 16.4 (16.9)
(Decrease)/increase in trade
and other payables (14.6) 2.8
Retirement benefit obligations
charge less contributions (1.8) 0.2
------------------------------------- ------- --------------
Cash generated from operations 42.9 90.7
------------------------------------- ------- --------------
16. Alternative performance measures
We use alternative performance measures (APMs) to assist in
presenting information in an easily comparable, analysable and
comprehensible form. The measures presented in this report are used
by the Board in evaluating performance. However, this additional
information presented is not required by IFRS or uniformly defined
by all companies. Certain measures are derived from amounts
calculated in accordance with IFRS but are not in isolation an
expressly permitted GAAP measure. The measures are as follows:
APM 1 Operating profit before exceptional items (referred to as
underlying operating profit) is based on operating before the
impact of exceptional items. This metric is used by the Board to
assess the underlying performance of the business excluding items
that are, in aggregate, material in size and / or unusual or
infrequent in nature. Exceptional items for FY 2023 are GBP7.5m,
details are disclosed in note 5;
Year ended Year ended
30 September 30 September
2023 2022
GBPm GBPm
----------------------------- -------------- --------------
Operating profit 73.2 88.5
Exceptional items 7.5 7.9
Underlying operating profit 80.7 96.4
----------------------------- -------------- --------------
APM 2 Profit before tax and exceptional items (referred to as
underlying profit before tax) is based on Profit before tax before
the impact of exceptional items. This metric is used by the Board
to assess the underlying performance of the business excluding
items that are, in aggregate, material in size and / or unusual or
infrequent in nature;
Year ended Year ended
30 September 30 September
2023 2022
GBPm GBPm
------------------------------ -------------- --------------
Profit before tax 72.5 87.7
Exceptional items 7.5 7.9
Underlying profit before tax 80.0 95.6
------------------------------ -------------- --------------
APM 3 Constant currency metrics are used by the Board to assess
the year on year underlying performance of the business excluding
the impact of foreign currency rates, which can by nature be
volatile. Constant currency metrics are reached by applying current
year (FY 2023) weighted average spot rates to prior year (FY 2022)
transactions;
Year ended Year ended % change
30 September 30 September
2023 2022
Group GBPm GBPm
------------------------------ -------------- -------------- ---------
At reported currency 307.0 341.0 -10%
Impact of FX translation - 10.5
Revenue at constant currency 307.0 351.5 -13%
------------------------------ -------------- -------------- ---------
Year ended Year ended % change
30 September 30 September
2023 2022
Sustainable Solutions GBPm GBPm
------------------------------ -------------- -------------- ---------
At reported currency 241.8 282.7 -14%
Impact of FX translation - 8.1
------------------------------ -------------- -------------- ---------
Revenue at constant currency 241.8 290.8 -17%
------------------------------ -------------- -------------- ---------
Year ended Year ended % change
30 September 30 September
2023 2022
Medical GBPm GBPm
------------------------------ -------------- -------------- ---------
At reported currency 65.2 58.3 12%
Impact of FX translation - 2.4
------------------------------ -------------- -------------- ---------
Revenue at constant currency 65.2 60.7 7%
------------------------------ -------------- -------------- ---------
APM 4 Operating cash conversion is used by the Board to assess
the business's ability to convert underlying operating profit to
cash effectively, excluding the impact of financing activities and
non-capital expenditure related investing activities. Operating
cash conversion is underlying operating profit, depreciation and
amortisation, working capital movements and capital expenditure/
underlying operating profit.
Year ended Year ended
30 September 30 September
2023 2022
GBPm GBPm
----------------------------------------- -------------- --------------
Underlying operating profit (as defined
above) 80.7 96.4
Depreciation, amortisation and loss
on disposal* 21.6 24.0
Change in working capital (48.9) (27.5)
Capital expenditure (38.5) (45.5)
----------------------------------------- -------------- --------------
Operating cash flow 14.9 47.4
Operating cash conversion 18% 49%
----------------------------------------- -------------- --------------
*Excludes the impact of loss on disposal of right of use
assets.
APM 5 Available cash is used to enable the Board to understand
the true cash position of the business when determining the use of
cash under the capital allocation policy. Available cash is cash
and cash equivalents plus other financial assets (cash invested in
deposit accounts greater than three months in duration) less cash
ring-fenced in the Group's Chinese subsidiaries which is not
available to the wider group;
Year ended Year ended
30 September 30 September
2023 2022
GBPm GBPm
------------------------------------------ -------------- --------------
Cash and cash equivalents 33.4 58.7
Cash ring-fenced in Chinese subsidiaries (3.4) (2.8)
Other financial assets 0.1 10.1
Available cash 30.1 66.0
------------------------------------------ -------------- --------------
APM 6 Underlying EPS is earnings per share based on profit after
tax but before exceptional items divided by the weighted average
number of shares in issue. This metric is used by the Board to
assess the underlying performance of the business excluding items
that are, in aggregate, material in size and/or unusual or
infrequent in nature; and
Year ended Year ended
30 September 30 September
2023 2022
GBPm GBPm
------------------------------------------- -------------- --------------
Profit after tax attributable to owners
of the Company 61.7 76.2
Exceptional items 7.5 7.9
Tax on exceptional items (1.7) (1.5)
Profit after tax before exceptional items
net of tax 67.5 82.6
------------------------------------------- -------------- --------------
Weighted average number of shares 86,937,187 86,897,353
------------------------------------------- -------------- --------------
Underlying EPS (pence) 77.7 95.0
------------------------------------------- -------------- --------------
APM 7 Underlying dividend cover is used by the Board to measure
the affordability and sustainability of the regular dividend.
Underlying dividend cover is underlying earnings per share/total
dividend per share. This excludes special dividends.
Year ended Year ended
30 September 30 September
2023 2022
p p
----------------------------------- -------------- --------------
Underlying EPS (APM 6) 77.7 95.0
Total dividend per share 59.56 59.56
Underlying dividend cover (times) 1.3 1.6
----------------------------------- -------------- --------------
APM 8 Return on capital employed ('ROCE') is used by the Board
to assess the return on investment at a Group level. ROCE is profit
after tax before exceptional items net of tax, finance costs and
finance income/average adjusted net assets. Adjusted net assets is
total equity attributable to shareholders at the year end excluding
cash and cash equivalents, other financial assets, retirement
benefit asset/obligations and borrowings. Average adjusted net
assets is (adjusted net assets at the start of the year plus
adjusted net assets at the end of the year)/2. The method of
calculating ROCE has been changed from FY 2022, with the
comparative restated on a consistent basis. The change has been
made following a review by the Board with the revised methodology
considered to better reflect long-term value creation.
Year ended Year ended
30 September 30 September
2023 2022
GBPm GBPm
----------------------------------------- -------------- --------------
Profit after tax attributable to owners
of the Company 61.7 76.2
Exceptional items 7.5 7.9
Tax on exceptional items (1.7) (1.5)
Finance income (1.3) (0.5)
Finance costs 0.7 0.3
----------------------------------------- -------------- --------------
66.9 82.4
----------------------------------------- -------------- --------------
Net assets 501.0 490.6
Cash and cash equivalents (33.4) (58.7)
Other financial assets (0.1) (10.1)
Retirement benefit asset (9.7) (14.9)
Retirement benefit obligation 2.5 2.7
Borrowings 39.7 22.5
Adjusted net assets 500.0 432.1
----------------------------------------- -------------- --------------
Average adjusted net assets 466.1 412.5
ROCE 14% 20%
----------------------------------------- -------------- --------------
APM 9 Return of sales is used by the Board to assess the overall
profitability of the Group. It measures underlying profit before
taxation as a percentage of revenue.
Year ended Year ended
30 September 30 September
2023 2022
GBPm GBPm
-------------------------------------- -------------- --------------
Underlying profit before tax (APM 2) 80.0 95.6
Revenue 307.0 341.0
Return on sales % 26% 28%
-------------------------------------- -------------- --------------
APM 10 Operating overheads is made up of sales, marketing and
administrative expenses, and research and development expenses,
before exceptional items. This metric is used by the Board to
assess the underlying performance of the business excluding items
that are, in aggregate, material in size and/or unusual or
infrequent in nature.
Year ended Year ended
30 September 30 September
2023 2022
GBPm GBPm
---------------------------------------------- -------------- --------------
Sales, marketing and administrative expenses 70.8 70.3
Exceptional items (7.5) (7.9)
Research and development expenditure 18.6 15.7
Operating overheads 81.9 78.1
---------------------------------------------- -------------- --------------
Forward-looking statements
Forward-looking statements
Sections of this Financial Report may contain forward-looking
statements, including statements relating to: certain of the
Group's plans and expectations relating to its future performance,
results, strategic initiatives and objectives, future demand and
markets for the Group's products and services; research and
development relating to new products and services; and financial
position, including its liquidity and capital resources.
These forward-looking statements are not guarantees of future
performance. By their nature, all forward looking statements
involve risks and uncertainties because they relate to events that
may or may not occur in the future, and are or may be beyond the
Group's control, including: changes in interest and exchange rates;
changes in global, political, economic, business, competitive and
market forces; changes in raw material pricing and availability;
changes to legislation and tax rates; future business combinations
or disposals; relations with customers and customer credit risk;
events affecting international security, including global health
issues and terrorism; the impact of, and changes in, legislation or
the regulatory environment (including tax); and the outcome of
litigation.
Accordingly, the Group's actual results and financial condition
may differ materially from those expressed or implied in any
forward-looking statements. Forward-looking statements in this
Financial Report are current only as of the date on which such
statements are made. The Group undertakes no obligation to update
any forward-looking statements, save in respect of any requirement
under applicable law or regulation. Nothing in this Financial
Report shall be construed as a profit forecast.
Shareholder information:
Victrex's Annual Reports and Half-yearly Financial Reports are
available on request from the Company's Registered Office or to
download from our corporate website, www.victrexplc.com
Financial calendar:
Ex-dividend date 25 January 2024
Record date# 26 January 2024
AGM 9 February 2024
Payment of final dividend 23 February 2024
Announcement of half-year results May 2024
Payment of interim dividend June/July 2024
# The date by which shareholders must be recorded on the share
register to receive the dividend
Victrex plc
Registered in England
Number 2793780
Tel: +44 (0) 1253 897700
www.victrexplc.com
ir@victrex.com
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END
FR EANALEFNDFFA
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