REG - Victrex PLC - Victrex plc - Preliminary Results 2023
05/12/2023 07:15
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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 (reported) % change
(constant currency(1))
Group sales volume 3,598 tonnes 4,727 tonnes -24% N/A
Group revenue £307.0m £341.0m -10% -13%
Average selling price (ASP) £85.3/kg £72.1/kg +18% N/A
Gross profit £162.6m £174.5m -7% -10%
Gross margin 53.0% 51.2% +180bps N/A
Underlying profit before tax (PBT)(1) £80.0m £95.6m -16% -18%
Reported PBT £72.5m £87.7m -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 £80.0m; reported PBT £72.5m
- 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 £25m-£35m 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 £10m revenue:
· E-mobility: £6m 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) £30.1m (FY 2022: £66.0m) 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 £134.5m vs FY
2022 £86.8m)
- 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 £80m-£85m 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
£10m revenues and we are targeting £25m-£35m 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 £6m 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 £6m revenues, new
customer collaborations and increasing penetration in major car brands.
"In Medical, we saw strong progress in Trauma and commercial revenue building
towards £1m. 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 (http://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
(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 (http://www.victrexplc.com) under the
Investors/Reports & Presentations section.
Victrex plc:
Andrew Hanson, Director of Investor Relations, Corporate Communications & +44 (0) 7809 595831
ESG
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 £307.0m, which was down 10%
(FY 2022: £341.0m). 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 £144.8m down 20% (H2 2022 revenue: £180.9m). 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 £241.8m (FY 2022:
£282.7m).
Medical revenues of £65.2m were a record and increased by 12% compared to the
prior year (FY 2022: £58.3m), 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 £85.3/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 £80/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 £300m (FY 2022: £294m).
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™, 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 £10m 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 £6m revenue this year, vs over £4m 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 £50m 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 £6m this year, with better
than expected progress as our materials supported major car brands. This
mega-programme includes Victrex XPI™ 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™
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 £10m 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 £10m 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 £1m 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 £3m, with the potential opportunity to £10m 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 £18.6m (FY 2022: £15.7m)
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 £162.6m (FY 2022: £174.5m), primarily driven by
lower sales. Energy costs eased, yet raw materials remained relatively high.
We also incurred some under-absorbed fixed costs (totalling approximately
£3m) 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 £7.6m (FY 2022: loss of £2.8m), 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 £3m 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 £7.5m, increased
to £81.9m (FY 2022: £78.1m) 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 £80.0m was in-line with our revised guidance and down 16%
on the prior year (FY 2022: £95.6m).
Reported PBT reduced by 17% to £72.5m (FY 2022: £87.7m). This reflects
exceptional items of £7.5m (FY 2022: £7.9m), 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 £2.0m (FY 2022: tax paid of £10.6m), 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 £501.0m (FY
2022: £490.6m).
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 £134.5m (FY 2022: £86.8m),
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 £38.5m (FY 2022: £45.5m), 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 £15m in total, with most spend already completed
and a further £5m 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 £30m-£35m, 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 £42.9m (FY 2022: £90.7m), 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 £33.5m (FY 2022:
£68.8m). This lower cash position reflects weaker demand and capital
expenditure. It also includes £3.4m ring-fenced in our China subsidiaries (FY
2022: £2.8m) and other financial assets of £0.1m, representing cash which
was held in deposit accounts greater than three months in duration (FY 2022:
£10.1m). 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 £39.7m (FY
2022: £22.5m).
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
£2.9m in convertible loan notes during the year. This takes the total
carrying value of assets in Bond 3D to £18.8m (FY 2022: £17.0m). 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 £40.1m and in July 2023 paid the interim dividend of
13.42p/share at a cash cost of £11.7m. After the year end, the Group renewed
its UK banking facilities, increasing the level of facilities to £60m (£40m
committed and £20m 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 £25m-£35m of revenues from mega-programmes in FY 2025
(current mega-programme revenues of £11m, which excludes £6m 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
£m £m (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 £241.8m (FY 2022:
£282.7m), 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
£m £m (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 £65.2m (FY 2022: £58.3m). In constant currency,
Medical revenue was up 7%.
Gross profit was £52.1m (FY 2022: £49.7m) 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 £2m 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 2023 30 September 2022
Note £m £m
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 2023 30 September 2022
£m £m
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 2023 30 September 2022
Note £m £m
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 2023 30 September 2022
Note £m £m
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 - 4.2
and loss
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 interests 2.6 -
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 capital Share premium Translation reserve Hedging reserve Retained earnings Total attributable to owners of parent Non-controlling interest
Total
£m £m £m £m £m £m £m £m
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 capital Share premium Translation reserve Hedging reserve Retained earnings Total attributable to owners of parent Non-controlling interest
Total
£m £m £m £m £m £m £m £m
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 £33.5m, having
reduced from £68.8m at 30 September 2022 following payment of the regular
dividends of £40.1m in February 2023 and £11.7m in June 2023 and a strategic
increase in the level of inventory held. Of the £33.5m, £3.4m 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 £30.1m, 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 £31.6m in its
Chinese subsidiaries (with a total facility of c.£34.2m available until
December 2026) and has unutilised UK banking facilities, renewed and extended
in October 2023, of £60m through to October 2026, of which £40m is committed
and immediately available and £20m 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 - £40m could be drawn at short notice.
Conversations with our banking partners indicate that the £20m 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 £30-£35m
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.£40m
and in the past an interim dividend of c.£12m has been paid in June, giving a
combined annual outflow of c.£52m.
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 2023 Year ended 30 September 2022
Sustainable Solutions Medical Group Sustainable Solutions Medical Group
£m £m £m £m £m £m
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 2022
£m £m
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 £7.6m
outflow (FY 2022: £5.6m outflow).
6. Income tax expense
Year ended Year ended
30 September 2023 30 September 2022
£m £m
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 2023 30 September 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 61.7 76.2
(£m)
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
£18.8m (30 September 2022: £17.0m), comprising investment in associate of
£9.1m (30 September 2022: £10.4m) and convertible loan notes of £9.7m (30
September 2022: £6.6m).
Investment in associate
The Group's investment in the ordinary share capital of Bond at 30 September
2023 is €14.7m/£12.9m (24.5%) at cost (30 September 2022: same), with a
carrying value of £9.1m (30 September 2022: £10.4m) 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 £1.3m (30 September 2022: £1.0m). 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 loan Interest Principal As at Interest CLA Currency As at
note agreements rate 1 October accrued drawdown movement 30 September
2022 2023
% €m €m €m €m €m €m
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 (€m) 7.4 0.4 3.4 - 11.2
Total (£m) 6.6 0.4 2.9 (0.2) 9.7
Under the 2023 CLA a further €1.6m 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 (£9.7m) but an impairment of the investment in associate of up
to £9.1m 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 £18.8m, 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 £3.5m (30 September
2022: £3.5m)
- Convertible loans in Bond at £9.7m (30 September 2022: £6.6m).
See also note 8 above.
10. Borrowings
As at As at
30 September 2023 30 September 2022
£m £m
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 (£5.1m) 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
(£26.5m, 30 September £15.7m), relating to the capital expenditure facility,
is repayable in line with an agreed schedule up to December 2026, of which
£0.1m (30 September 2022: £0.9m) 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
£0.9m (FY 2022: £0.3m) 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 (£1.7m) 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
(£5.6m) 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 £8.1m
at 30 September 2023 (30 September 2022: £6.8m).
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 £0.3m was capitalised into assets under
construction (30 September 2022: £0.2m).
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 2023 As at 30 September 2022
Notional contract amount Carrying amount and fair value Notional contract amount Carrying amount and fair value
£m £m £m £m
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 £7.6m has been recognised in the
period (FY 2022 - losses of £2.8m).
12. Other financial assets
At 30 September 2023 the Group had £0.1m of cash which was held in deposit
accounts greater than three months in duration (30 September 2022: £10.1m).
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 (£2.6m), split RMB 15 million (£1.7m) in the form of loans
(see note 10) and further equity investment of RMB 7.5 million / £0.9m.
In the year to 30 September 2023 the subsidiary incurred a loss of £2.6m (FY
2022: loss of £2.9m), of which £0.7m (FY 2022: £0.7m) is attributable to
the non-controlling interest. Total non-controlling interest as at 30
September 2023 is £2.0m (FY 2022: £1.8m).
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 2023 30 September 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 2023 30 September 2022
£m £m
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 long-term lease liabilities (0.2) -
Equity-settled share-based payment transactions 1.1 1.8
(Gains)/losses on derivatives recognised in income statement that have not yet (2.5) 4.0
settled
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 £7.5m,
details are disclosed in note 5;
Year ended Year ended
30 September 2023 30 September 2022
£m £m
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 2023 30 September 2022
£m £m
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;
Group Year ended Year ended % change
30 September 2023 30 September 2022
£m £m
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 2023 30 September 2022
£m £m
Sustainable Solutions
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 2023 30 September 2022
£m £m
Medical
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 2023 30 September 2022
£m £m
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 2023 30 September 2022
£m £m
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 2023 30 September 2022
£m £m
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 2023 30 September 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 2023 30 September 2022
£m £m
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 2023 30 September 2022
£m £m
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 2023 30 September 2022
£m £m
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 (http://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 (http://www.victrexplc.com)
ir@victrex.com
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