Victrex plc

Good day, ladies and gentlemen, and welcome to the Victrex Q3 IMS call hosted by Chief Executive Officer Eason and Chief Financial Officer Ian Melling. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. I would like to remind everyone that this call is being recorded. I will now hand over to Jakob Sigurdsson to open the call. Please go ahead.

Yeah, thank you, and good morning, everyone, and welcome to the call for Vectrex's Q3 interim management statement. I'm Jakob Sigurdsson, CEO, and I'm joined on the call by Ian Melling, our CFO, and Andrew Hansen, our head of IR. I will firstly summarize the key points of the announcement. Ian will then cover the numbers. Now we're going to come back and touch on some further progress in our mega programs, and then explain the latest outlook. We will then open the call to Q&A towards the end. Remember also that today's IMS follows on from a recent trading update three weeks ago, where we indicated that our expectations for Q3 and revised expectations for the full year. The overall key message today is that the outlook for the year is unchanged from what we communicated in that announcement. And in fact, the Q3 numbers are in line with our guidance at that time. So let's first turn to the headlines from Q3. Firstly, volumes are lower on macroeconomic weakness and destocking across several end markets. And as we talked about a few weeks ago, this is driven by electronics, energy and industrial, and value-added retailers. Ian will cover those numbers separately in his session. We do continue to see really good progress in aerospace, which is on track for double-digit growth on a full-year basis. Automotive is also stable. And in medical, we're pleased that we're continuing to see good progress. And this business is well on track for double-digit growth, although we do have a tougher second half comparative in medical. And remember, the second half of 2022 saw a bounce back in elective surgeries across several regions. So overall, despite a very challenging period, we do remain well positioned for a macroeconomic recovery. And I will now hand it over to Ian.

Ian.

Thank you, Jacob, and good morning, everyone. In terms of headline numbers, Q3 group revenue was down 23% to £72.2 million compared to the prior year Q3 of £93.4 million. On volume, Q3 group volume was down 38% to 818 tonnes versus Q3 22 of 1,323 tonnes. Remember that Q3 last year was a record quarter. On a year-to-date basis, group revenue of £234.4 million is 8% down on the prior year, £253.5 million, with year-to-date group volume of 2,759 tonnes being 23% down on the prior year's 3,586 tonnes. As Jacob has noted, Q3 weakness was driven by electronics, energy, and industrial and value-added resellers. We continue to see some variability in month-on-month volumes in Q3. Visibility does remain low going into Q4. However, our sales mix remains strong. Pleasingly, aerospace is going well, and we're continuing to see medical remaining strong, which will help given its higher margin profile. I'd also like to cover pricing, given the good progress we've continued to make on price increases this year. Q3 saw further improvement in average selling prices, taking the year-to-date ASP to £85 per kilogram, supported by price increases, sales mix, and currency. For the full year, we now anticipate ASP will be above £84 per kilogram. As a result of improved average selling prices, together with easing energy costs, we are seeing gross margin improvement during the second half compared to the prior year. However, with weaker volumes, gross margin improvement will be slightly held back by lower asset utilization and operating leverage for the rest of the year as a result of the weaker demand. Turning finally to our financial position, we continue to have a highly cash-generative business model which supports growth investments and shareholder returns. Total cash at the end of June was £27 million, which includes £3.5 million ring-fenced in China. There's no change to the guidance on capital expenditure for this year, and we look forward to seeing CapEx coming down to around 8% to 10% of sales into FY24 in the midterm. This will support improved cash flows, particularly once we start to see inventory unwind as well. Thank you. And with that, I'll hand back to Jakob.

Thank you.

A brief word on our growth programs, which show some good progress. A couple of areas to highlight this time around. Firstly, on e-mobility, we now anticipate annual revenues in our e-mobility program will exceed our original expectations, reaching 5 million pounds in FY2023, versus the 3 million that we originally guided towards. We're picking up some contracts in this area. and are set to see quick growth in e-mobility over the next couple of years. E-mobility is probably now the most advanced of our mega-programs in terms of revenue. And remember that PEAK is used in various kinds of applications of electric power, both in the battery area and the motor area. And it's, again, a testament of how PEAK can support very demanding performance requirements. In trauma, we're making a group of people to accomplish at the trauma place, serving a growing demand in the U.S. and in Asia. Run rates are now building up towards a million-pound revenue this year, with a step-up in place being delivered to the rest of the current year and into 2024. And as we've talked about, we have around five direct development agreements in place right now and showing strong signs of adoption. We have a broader set of customers now across both U.S. and Asia, and the main demand is being driven by Interbones, which now is a part of the ConMed group, where demand for alternatives from our solutions has been rapidly increasing. Turning again to our outlook, you know, as I said at the start of the call, the overall outlook is unchanged from what we recently communicated. And as a reminder on that, we guided to a full-year adjusted PPT in the range of 80 to 85 million pounds. We also indicated that full-year volumes were tracking more than 20% down year on year, and that still remains our expectation. Despite the weaker macroeconomic environment, for the remainder of the financial year, we're expecting strong ASP, as Ian touched upon, a strong sales mix, easing energy costs, And clearly, our self-help programs will remain supportive. Overall, we continue to be well-placed for the time when the macroeconomic environment improves. Looking a little bit beyond FY23, it's worth noting that we have a strong and diverse core of business, even if we're in a cyclical downturn right now. Growing commercialization in our mega programs with some very notable milestones achieved. It's also worth remembering that capital investment, which is set to reduce, will support improving cash flows as we enter 24. We are coming off a period where we just tested heavily to support our growth opportunities going forward. And this will now be significantly reduced as most of those are in place by now. And last but not least, we have very strong ESG credentials and enable our customers to to achieve their ESG-related goals. So in summary, our medium to long-term proposition remains strong. And I will now open it up to the Q&A.

Thank you. Ladies and gentlemen, to ask a question through the phone lines, please press star then 1 on your touch-tone phone or on the keypad on your screen. If you wish to withdraw your question, you may press star and then 2 to remove yourself from the question queue. Once again, if you would like to ask a question, you're welcome to press star and then one. The first question is from Ria Kotecha of Bank of America. Please go ahead.

Hi, morning. It's Ria on the line. I have a couple of questions, please. Can you talk about demand conditions by end market through June and early July compared to May? Have you had any initial orders come through for post-September or discussions with customers that indicate a pickup after the summer? Second, peak prices at £88 a kg for the third quarter seems to be tracking ahead of your expectations. What proportion of that is structural price increases versus mix for medical being stronger and VAR being weaker? To what extent do you think customers might prolong the restock if they anticipate peak prices softening from a high price level? Third, what's driving the upgrade to the EVMEC program revenues compared to the first half figure? Is it pricing tracking ahead of your expectations or volumes being stronger? And can you remind me what the Victrex content in an EV is today compared to the 10 grams that you disclose in the average car? My last question is, we also saw some M&A in the polyimide space last week that can be used in magnet wire applications and EV batteries. Do you see peak and PI as substitute materials in an EV or are they used for different purposes in your view? Thanks.

So I think that was quite a number of questions there. So let me see if I can catch track of all of them. So in the demand outlook right now and September and beyond, so there is no change in assumptions behind what we said three weeks ago, and no specific changes either behind sectors there either. So our forecast for aero, auto, energy, value-added resellers, medical, It's pretty much unchanged from that point in time. We do not have much visibility beyond September, really. But if we look at what we do know, there is sort of in general expected to be a continued growth at the same pace and same slope in aerospace as we've seen here today. The industry is still sort of nudging back to pre-COVID levels. On the automotive side, there is a growth in production this year. There is forecasted to be growth on this year's number going into next year. Supply situation there is easy as it relates to availability of chips and other components in the supply chain. It supports growth into next year, but at probably lower rates than this year. On the electronic side, I think... As we look into 2024, I remember this is one of the sectors that has been relatively slow this year. Probably capitals and semiconductors is probably going to be down probably 20% this year. It's forecasted to grow at and about roughly 10% I think on a global basis next year. Varies a little bit by regions, Taiwan and Korea. actually looking better as we head into next year, which is good for us. I think Korea is expected to grow 17% next year. And Taiwan, probably about flat, but overall good growth in Semicon and CapEx in Semicon next year. Chip demand, I think global semiconductor market is predicted to experience a downturn of around 10%. They were called right. That's expected to sort of turn around next year to between 10% and 12% growth. And on smartphones, as an example, on the electronics side, I think that's expected to be down around 4% this year and then grow at a similar rate, so reversing in 2024. So we should expect to see some recovery in electronics broadly. Now moving into medical, we're expecting to see continued growth there, but as Ian mentioned before, we will also start to face tough comparisons in the second half of this year compared to to, well, from here onwards, actually. So we had a strong and a rising demand in the second half of last year. A tougher comparison this year, but we should still be showing and seeing growth in medical, and there's still some COVID catch-ups to be caught up with, particularly in China, as they opened up later. And in energy and industrials, that's still a bit of a question mark, particularly on the industrial side, and as we've seen through BARS, You know, that's a sector that has been particularly hit in recent times by high cost of capital or relatively high cost of capital compared to what we've seen in recent times. On the pricing side, you know, a big part of our pricing increases have been structured as opposed to through surcharges. So we're expecting pricing and other selling prices to be holding out towards the end of the year. Now clearly, there is a mixed effect in there as well. So as industrial sectors pick up, we will see a reduction in average selling prices. You mentioned inventory levels in your third question. From what we hear in our customer base, the de-stocking effect seems to have sort of gone through to a large degree, and I would basically say that the demand on our immediate customers, and therefore the demand towards us, should start to mimic more sort of the demand in the end markets. And that level of demand would be higher than what we've seen in our numbers in the past couple of quarters. where de-stocking has had a significant extra impact in the bull with the fact that we're seeing from the demand patterns resulting after COVID has caused. Now, you mentioned about e-mobility. We're getting into a number of applications that are associated with batteries and motors and some interesting new opportunities there. that have not necessarily been highlighted in the mega programs have started to deliver. And then clearly, you know, demand for coatings on wire or peak coatings on wire is driving a part of that as well. So that's getting a stronger and faster adoption than we anticipated when we got it towards the 3 million mark that we referenced in our earlier material that we've now upgraded towards roughly 5 million this year. And in sort of portraying the opportunity You know, we have indicated that sort of the average peak content per car in the ICE world, you know, when we started to use these indicators, was around 8 grams per car. That's now well above, you know, 11 grams roughly. That's where peak is used in all kinds of valves, you know, seal rings, bushings and bearings and the like. There was an upside to that by increased penetration of gears, getting to roughly 20 grams per car in the overall peak. sort of size of the opportunity on average that we had sort of guided towards in the e-mobility was around 100 grams per car or in excess of 100 grams per car on average. Now, having said that, you know, the content in a motor these days is where peak is used is probably, you know, somewhere between, let's say, 250 and 300 grams per motor. So you've got to be careful with averages, and I would just underline that. Polyamide, yeah, very good material, but not necessarily a direct replacement for PEEP, but a very good, you know, material as well and has a number of interesting applications in high-performance areas. I think, you know, these were all of six questions that I noted, but, you know, please correct me if I missed out on anything again.

Hi. Yeah, just to follow up on the last two ones, so polyamide, What specifically is the Victrex EV content today in terms of grams? Is that with reference to the 250 to 300 grams per motor? Because I guess your application is in the motor wire coating, so I'm trying to understand what the gram figure is today. And then my last question with regards to polyimide versus polyamide. Thanks.

Yeah, no, polyamide is what I was referring to, maybe. My accent sort of betrayed me there. I was referring to polyamides there with an I, to be clear. And as it relates to our content right now, remember that our opportunities are driven to the move towards 800 volts. And these next generation of batteries are really just taking off right now. So our content in a car right now is relatively low. But as we head more into the new world, of higher voltage and higher performance requirements, then that creates a significant opportunity for us, and we're starting to see that in the platforms and the cars that we are specified on. So it's low right now, but to give you an example, I think when we painted the picture of an opportunity of around 100 grams per car way back when, then I think we're seeing that opportunity actually being manifested in the quantities that are used in an electric vehicle right now, both in the motor area and the battery area, and clearly some of the opportunities that we had in the ice world are being translated over into electric vehicles as well.

Okay, that's really clear. Thanks so much.

Thank you.

The next question is from Shetan Udeshi of JPM. Please go ahead.

Yeah, hi. Thanks. Morning. I just wanted to follow up on the previous question, actually, in a different way. If I look at your ASP, you know, 88 pounds per kilo, it's up 25% year on year from same point last year. Maybe I was just curious if you can break it down between how much of that is actually just pure mix impact because of medical versus very low volumes in wires and electronics, where I think the pricing is typically less than 50%. And how much of it is the underlying increase within that 25% increase that we've seen year on year in Q3? And I think if I'm cynical, I would say, you know, WICREX has never seen this level of ASP in the past. But also, you know, we've never seen the kind of inflation probably you've seen in the last two years. And you're still sort of in a catch-up mode. So I'm just curious, what is your strategy around pricing as we think about next six, nine, 12 months? Are you going to start giving back these price increases now that the inflation is easing? Or are you looking to cover the inflation or other cost headwind that you've had in the business for the last two years and the margins are still well below where you used to have? um, before you, you start contemplating any move on, uh, you know, pricing. I think this is a broader question because I think there's this perception that we've had that Victrex over a number of years have suffered price erosion because of competition. So maybe you can just address that in a, in a broader, uh, light as well. And last point was just, uh, You know, you've overproduced for the three quarters of this year, and clearly the inventory levels are very high. So can you remind us what sort of under-production charge should we be modeling for Q4 and next year as you sort of start to unwind that high inventory levels? Thank you.

Yeah. Okay, Chet, let me start on the first piece and the last piece, and maybe Jakob can comment a little bit on our pricing strategy going forward as well. So clearly there are a number of moving prices in our overall ASP this year, and the 25% year-on-year increase you talked about in Q3. So I'm going to talk more about year-to-date ASPs. But when we look at it in the round, and it's slightly different by different areas, but in the round, I would say it's mid to high single digits, like-for-like pricing. So that's the level kind of price this year versus price last year. And the vast majority of that is structural price increases rather than any surcharges, which fell away as the energy prices came back down. The other two impacts that we're seeing are clearly the mix effect that you spoke about with lower volumes in the bars and industrial sector. while the medical business has held up quite well. So mix is playing a role and currency has played a role, particularly in the earlier parts of the year, although that currency effect should start to be flatter given where rates are now as we look into the future. So that's really the breakdown in terms of where we see ASP and clearly as the industrial piece and the VARs improve in terms of volumes, then we will see a hit on the overall ASP from that. Like I said, I'll leave pricing strategy for Jakob to come back to. Just on inventory levels, yes, our inventory levels are high. We did that consciously in part knowing that we wanted to shut down some of the plants towards the end of this financial year and into the start of the next one to do some maintenance and de-bottlenecking work and bring that forward and get that out of the way. So it's a good opportunity to do that. We do have quite long lead times on some of our raw materials as well. So we're pushing those out where we can, but we do probably have a little more raw material given what's happened to demand in the last couple of months as we've seen that demand not come back as we'd have hoped. So I do expect inventory at the full year to be a little bit higher than it was at the half year. say in the, you know, 10% or so potentially higher than it was in the half year, and that number to then come down next year as the demand returns. Now, it's, you know, saying exactly what that's going to be and exactly what the what the impacts of kind of the lower production levels will have on the margins next year. That really, for next year, I think that really needs to wait for our guidance in December as we get a view on what our sales volumes are expected to be next year. In terms of The second half of this year and what we're expecting, I think it could be a point or two of gross margin from the lower sales and the lower kind of operating leverage, if you like, in gross margin. Yeah, gross margin would still be up year on year in the second half. So, Jakob, maybe you want to comment on the pricing strategy a little bit?

Yeah, I think on the pricing strategy, it's worth keeping in mind that Peak does go into a number of highly critical applications where not just the quality and continuous quality of the material is paramount in the performance properties, but also the stability of demand and the reliability of supply across the globe. And I think that Vectrex has earned a good reputation for all of these particularly in recent times in the way we supported our customers during COVID, going into COVID, going out of COVID as well. You know, we were able to serve at a high level, you know, all over. Also worth noting that we did support our customers on the way up. We did honor our contracts, even if it was painful during the period. And we still do have some things to recover from that period as well. We are fully intent on recovering the volume under the curve, if you wish, and at this point in time, no plans for any price decreases, for sure. As Ian mentioned before as well, most of the price increases were structural in nature, with a limited use of surcharges, even if that was an alternative in some situations. That also clearly has an implication on on any potential decrease in prices, but I would underline none of those are planned at this very moment. That's clear. Thank you. Thank you, Chetan.

Ladies and gentlemen, just a final reminder, if you would like to ask a question, you may press star. The next question is of Numa Securities. Please go ahead.

Hi, thanks very much for the call and thanks for taking my questions. Just two, if I could do, please. The second, first one is, could you just talk about like a level of sort of cash investment during Q4? You've had that during the second half is the first go in Q4 or know had we done that and therefore following from that just an idea sort of home investment uh is there to go q4 just again sort of thinking about kind of year-end cash positions etc um so that's the first question if you could um just to sort of come back on the pricing point and i guess the margin expectations as we move into next year um clearly there are a number of moving parts there but Is it right in thinking that you're pretty confident that you can kind of hold on to that price increase and therefore the key variables for gross margins next year will be sort of volume and mix? Is that my sort of the key takeaway here?

Yeah, thanks, Kevin. So in terms of In terms of inventory and capex in Q4, I mean, I don't think we typically guide on kind of quarterly movements on these things. But, you know, we have been investing in inventory and we do expect to, you know, start some of this deep bottlenecking work in Q4. So, inventory is probably... You know, not far off where we'd expect it to end the year. I think at this point, there's probably a bit of capex to go. That's probably relatively evenly spread over the year. So, you know, I don't expect a significant movement in the cash number from where we've disclosed today at Q3 by the end of the year in the round. Yeah, so that would be my guidance on capital. In terms of price increases and holding on to those going into next year, I think, you know, Jakob just mentioned around you know, of looking to do that where we can. Absolutely, you know, we supported customers as costs were going up and, you know, we've put price increases through now and we would look to hold on to them where we can going into next year. That's not to say that there isn't going to be more pressure on price. I'm sure there is. And will we be able to continue to push price increases through? I think that would be that would be a factor. In terms of gross margin going into next year, I think a couple of things to bear in mind. Yes, I think volumes are clearly critical and we'll see where we are on that in terms of the guidance in December. I think the other two things to bear in mind, we've been flagging for a while that the startup of the plant in China is going to have a drag on gross margin next year as we bring on the cost of operating that plant when the revenue is just starts to come through so that that could um that could drag you know a couple of points on margin i would say next year uh potentially um yeah and i think i and then and then and then yeah it comes down to volumes and uh where we are on asset utilization and how much inventory we we need to make next year in terms of you know looking at when the recovery comes how strong that recovery is and then what inventory we need going into 25.

Great. Okay, that's helpful. Thanks very much. Thank you. Thanks, Kevin.

There are no further questions on the conference line. I will now hand back over to Jakob Sigurdsson for closing remarks. Please go ahead, sir.

Thank you. So thank you all for joining us today. We clearly look forward to seeing any improvement in the macroenvironment when that happens, and we'll update again at our full year results in December. So thank you, everybody, and enjoy the rest of the summer.

Ladies and gentlemen, that concludes this conference. Thank you for joining us. You may now disconnect your lines.