Victrex plc

Good day, ladies and gentlemen, and welcome to the Victrex interim results. At this time, all participants are in listen-only mode. Later, we will pick up the question and answer session through the phone lines, and instructions will follow at that time. I would like to remind all participants that this call is being recorded. I will now hand over to CEO of Victrex QSC, Dr. James Rickard, for the presentation. Please go ahead.

Good morning, everybody, and welcome to the Victrex interim results presentation. For those that don't know me, I'm James Routh, and I've been CEO at Vectrex since January. And I spent the first four months working at pace on the short-term actions needed to address the performance issues we've seen over the past few years, along with reviewing and updating our medium-term strategy. That being said, I've been greatly impressed by the passion and capabilities of the Vectrex team, and the fundamentals of the business remain robust. So, I'm confident that we can drive dramatically improved financial performance over the medium term. Today, I'm joined by our CFO, Ian Melling, and our Director of Investor Relations, Andrew Hanson. So in terms of the agenda today, I'm going to take you through the headlines of our H1 results, and then some updates on our end market. Before Ian will take you through the financial performance. Then I'll come back and give you my initial observations of Bitprep, provide an update on the previously announced profit improvement plan, and provide a high level overview of our strategic framework before providing a summary announcement. and then we'll turn to Q&A. So, overall, the first half of the year was characterized by a weak Q1, offset by a strong Q2, resulting in overall revenues up 1% on the prior year. The weekly Q1 period was due to particularly low seasonal sales in December, with some deferments into January, particularly with Avar discussions. And the gross margin of 41.7% was down 240 basis points on prior year, for a combination of price pressure, mix, and currency. This all fed through into an underlying PDT of 19 million, 18% lower than prior year, while free cash flow was good at 22 million. I'll provide more information later in the presentation, but in summary, the profit improvement plan is progressing well, with actions already taken to reduce global headcount by around 10%, and the launch of a new organization structure best aligned to growth and performance. The strategy review is nearing completion, and today I'm announcing we'll be holding a capital markets day in September, detailing our approach to dramatically improve financial performance. As part of the strategy review, we're actively reviewing and simplifying our portfolio of products, facilities and operating sites, and as a result, we've recorded a non-cash impairment of our China manufacturing plant of £60.6 million, which Ian will talk through in more detail later. And it's really important to know this relates to operational capability of the plant itself and not market demand. Demand in China remains robust. It's our fastest growing region. The continuing growth in the period has got the broad range of industries, including aerospace, automotive, and medical. For those that aren't aware, we service a wide range of end market segments and geographic territories and are split into two primary divisions, medical and sustainable solutions. By end market volume, value-added retailers, or VARs, are the largest of 42%, where we use Xtrex peak to form stock shapes or compounds, and these are then sold on to a wide range of end market sectors. The next largest sector by volume is transport, which consists of specialized applications for peak in automotive and aerospace. Energy and industrial consists of customers in oil and gas, renewables, and broader industrial applications. And electronics consists of peak used in consumer electronic devices, including smartphones and home appliances, as well as in semiconductor manufacturing. Finally, medical is the smallest market by volumes, with a considerably higher average selling prices, and made up of peak sales of implantable materials and devices, and peak use in non-implantable medical applications, such as tools or pharmaceuticals. Overall, our volumes are up 6%, with AST down 4%, for a combination of mix and price. with lower proportional medical volume and an increase in lower price point sustainable solutions sales. Overall, sustainable solutions revenue was up 3%, driven by good performance in electronics, energy, industrial, and in bars, with medical sales down 9% due to mixed competitive prices and some order phases. And importantly, we've seen some stabilization in spine sales over the period. By region, EMEA remains our largest territory at 44% of revenue, with Asia Pacific running around a third, and the balance in the US. APAC revenue grew by 1% in the first half, led by Greater China, with our other two regions broadly flat. The APAC region, and China in particular, is our fastest growing territory, and along with the US, are our focus areas for growth. By end market, we saw all market segments deliver volume growth growth except for automotive, which declined 6% on volume and continues to be impacted, particularly in Europe due to the well-documented challenges with European automotive OEMs. In general, this remains a challenging market driven by lower production and lower than anticipated EV sales. And the industry production forecast for 2026 is down 1% at 92 million cars, with ICE production down 7% and EV and hybrid vehicles up 4%. with ICE accounting for the majority of the 92 million cars forecast. It's important to note that most Victrex applications are drivetrain agnostic across both ICE and EV, for example, ADF and . So, the EDF side of the opportunity that we talked about before, particularly in batteries and motors, for Victrex has not yet been realized. In aerospace, volumes are up 9 cents after slow start in Q1 with strong improvement in Q2 and continuing momentum as start of Q3. We see really good opportunities for peak thermoplastic composite solutions, alongside full applications in brackets, fasteners, and thermal acoustic blankets. The sector saw slower production rates in 2025, with some improvement at the start of 2026. Both Boeing and Airbus bill rate forecasts show a 20% increase in 2026, driven by the 737 match recovery. And VEXPEC has also been specified on the COMAC C919 aircraft in China, the COMAC forecasting 25 aircraft to be built during 2026. Electronic volumes were at 14 cents with a strong recovery in Q2 after a weak first quarter. Semiconductor demand is recovering well, mostly driven by AI-related infrastructure rather than broad consumer volume growth. Based on the consensus of all industry forecasters by TMFC, Samsung and Intel chip demand is forecast to be up 4% in 2026. Smartphone shipments are down with industry flagging memory shortages as Samsung reported a 6% reduction in the first quarter this year. Energy and industrial volumes were up 19% as momentum continued throughout Q1 with an acceleration in Q2. and with a buoyant oil market and a desire to maximize output, maintenance capacity is spent by our customers, although global risk counts is down 70% year-on-year. And in general industrial, global PMIs are variable and volatile, but all above 50 at the end of the first half. In medical, given the high value nature of our business, revenue is a key metric we look at rather than volume. H1 reflected a real mixed shift, with fine broadly stable, but with non-fine growing much stronger in non-infantile applications, and pricing within certain applications was softer, particularly in China. Order failing was also a key factor during H1, with some orders shifting out into the second half. In medical geographically, the U.S. remained weak, with China and Asia Pacific seeing strong growth opportunities, and Asia Pacific now represents 24% of medical, and that was 9% 10 years ago. VAR volumes are up 5% after a very slow start in Q1, as already noted, through improvement during Q2. This remains a highly competitive market for a typical contracting yield occurring in calendar Q1. And it's really important to note that VAR are key partners to help us grow the market for Victor XP. So, I'll now hand over to Ian to take you through more detail on the financial results. Thank you, James, and good morning, everyone. As James noted, it was a soft start to our financial year in the first quarter, but momentum improved significantly in Q2. I'd like to cover the key drivers for the half, starting with our income statement, then covering our profit and gross margin movements. We'll then turn to the key cash license, cover the detail around our exceptional license for H1, but also our expectations for those for the full year as we proactively suggest the number of actions as part of the profit improvement plan. Moving to slide seven in our income statement, starting with revenue, up 1% to 147.1 million pounds, and up 2% in constant currency, driven by good volume growth of 6%, offset by next price in currency. In Q2, revenue was up 7%, driven by volume growth of 14%. James has covered the detail of the end markets, which are driving these volumes, but it's worth reiterating the overall sales mix in the first half, which shows sustainable solutions increased in proportion compared to many. There was also an adverse impact on AFP caused by mix within both divisions. In sustainable solutions, we saw a much stronger performance in bars during key two, after a softer start to the year, and strong momentum from energy and industrial where volumes were at 19% and a half. At the same time in medical, while spine was stable, we saw an adverse mix within non-spine, including growth in non-implantable applications, alongside some price pressure in certain applications and drugs. Finally, it's worth noting that many of our contract renewals take place at the start of the calendar year, particularly in the VARs. These negotiations took place in a challenging price environment, price in the Middle East conflict, but we were largely successful in retaining and in some cases growing business with modest price concessions. The same is true in energy and industrial where we continue to regain business, previously lost to competition on price. On average selling prices, H1 ASP was down 4% year on year, driven by mix in price, but we saw a stable ASP sequentially for H1-2026 versus H2-2025, and the detail of this is shown in slide 25 in the appendix. The market repeat remains competitive, particularly in the bars and energy and industrial end markets, which are seeing the most price pressure. Price is more stable in other end markets, so the competitive start remains. Taking an overall view on like-for-like pricing across the group, the continuing average pricing impact overall is a decline of around 1 to 2% per year. The divisional revenue summaries are also shown in the appendix on slide 23, with sustainable solutions revenue at 4% and medical down 9%. Moving on, currency weighed slightly on our half-year revenues with the corresponding gains in currency hedging of 1 million pounds as shown on the chart. First profit was 5% lower than the prior year at 61.3 million pounds, or down 2% in constant currency. Other than currency, gross profit was impacted predominantly by sales mix and price. In respect to cost of manufacture, we expect to produce broadly similar volumes to the prior year, and therefore do not expect to see any noticeable benefit from asset utilisation this year. We did see some increased costs in respect of wage inflation and the annualisation of the NI increase, but we were more than upset by raw material benefits that I'll come onto in the next slide. Turning to overheads, overheads for the half were up 3% to 41.3 million pounds. Excluding wage inflation and reward, overheads were globally stable with strong cost control in place. H1 did not see any material benefits from our profit improvement plan with these coming in H2. Interest was an expense of approximately 1 million pounds to the half and is expected to be around £2 million expense on a full year basis. Currency was adverse during the period with just over £1 million impact to PDT. And we anticipate this being slightly first half weighted, meaning an approximate £2 million headwind based on current spot rates and hedging in place on a full year basis. More detail on currency is shown in the appendix on slide 28. This results in underlying profit before tax of £19 million. down 18%, down 14% in constant currency. After the impact of the 63 million pounds of exceptional items, we reported in H1, we saw a loss before tax of 44 million pounds versus a reported profit before tax in H1 2025 of 17.2 million pounds. I'll cover exceptional items shortly. Underlying earnings per share of 17.9 cents was down 21%, slightly worse than the movement in underlying PVT. The tax charge in the period was £4 million compared to the prior year charge of £3.6 million. The reported tax rate of minus 9.1% is impacted by the non-taxable impairment of the China manufacturing site. The H1 underlying tax rate of 24.4% is based on the expected full year rate. This is above our mid-term guidance of 15 to 19%. as a result of unrecognized losses in China and the proportion of UK profits available to the patent box. Turning to slide eight, which shows the underlying PDT movements. Looking at the key movements beyond the 1.1 million pounds adverse impact from currency, sustainable solutions volume was a 3 million pound benefit with good growth in a number of home markets. Sustainable solutions pricing next with an adverse impact of 2.8 million pounds. which reflects some of the points covered earlier, including an adverse mix of the likes of energy and industrial, so good growth in the half, alongside some contract renewals or regained business at lower prices. Medical pricing next was a 1.7 million pounds adverse year-on-year movement driven by the mix of applications and particularly strong growth in non-impossible. Raw materials provided the benefits of 1.2 million pounds, as we continue to make good progress in our procurement processes, allowing us to take advantage of favourable market conditions. So, as we noticed in our announcement, we are mindful of potential future energy and raw material price inflation in FY27. Wage inflation and targeted investment totals of £2.8 million, including the impact of the NI increase and a below-inflation pay increase across the organisation. As a result, underlying PVT was £19 million. Turning to slide nine, where we cover gross margin. Disappointingly, gross margin was below our guidance for the half, and we do now expect gross margin for the full year to be slightly below the prior year 45.3%. But with some improvements in H2 over H1, driven by MIPS and medical, based on our latest money. Our Indicative Guidance Summary is shown on slide 22. at 44.1%. Currency was an adverse impact of 80 basis points. The mix between the two divisions with a slightly higher share of sustainable solutions business in the third half compared to last year drove an adverse impact of 50 basis points. Within sustainable solutions, price and mix represented an adverse impact of 120 basis points. And that was 50 basis points within medicine. Raw materials gave us a benefit of 60 basis points. resulting in H1 2026 gross margin of 41.7%. Our gross margin excluding the plant in China was 43.9%. Turning briefly to cash flow in slide 10. The detailed cash flow items are shown in the appendix on slide 26. The main headline here is continuing strong cash conversion at 109%. slightly lower year on year, but a key measure of our cash flow efficiency and a positive result. This is one of our key strategic objectives in the organization, which we remain fully focused on. Free cash flow is stable year on year at 22 million pounds. We've maintained our interim dividend of 13.42 pence per share, which will be paid on the 26th of June, representing a cash amount of around 11 million pounds. Remember, we also paid the FY25 final dividend in February, which represented a cash-out flow of approximately 40 million pounds. CapEx was lower in H1 versus last year at 7.4 million pounds, and we are now going to FY26 full-year CapEx being below the 8% to 10% of revenues guidance as we continue to control spend carefully. Net debt at the half is slightly higher at 45.4 million pounds, but at 0.65 times net debt to underlying EBITDA. well within our target range of 0.5 to 1 tax. So I'll finish on slide 11, exceptional items. The main driver here is the impairment of our China manufacturing facility in Hanjin. This was a non-cash impairment of 60.6 million pounds, which together with 2.4 million pounds of exceptional items associated with restructuring and reorganization led to total exceptional items of 63 million pounds in the first half. material increase on the prior year. A more detailed summary of this impairment is covered in our announcement but to summarise the impairment follows the conclusion after a period of continuous running in H1 that part of the process technology in one of the final manufacturing stages at the plant is not capable of delivering the original main capacity of 1500 tons meaning we are not currently able to maximise full capability of this asset. This was the main basis of an impairment indicator, which caused us to assess the value in use of the challenge plan. In assessing that value in use, we have undertaken a discounted cash flow calculation under the principles of IEA 36, impairment of assets. There are two important things to note about this calculation under the guidance of IEA 36. Firstly, the calculation does not assume further enhancement of the assets. and therefore it remains limited to its current capacity. Secondly, the calculation is limited to five years future forecast cash flows and a terminal growth rate over the remaining life of the asset. And therefore, further improvements from year six onwards do not significantly contribute to the value interest calculation. As a result, the calculated value interest is 10.2 million pounds, and the resulting non-cash impairment, as I've already said, is 60.6 million pounds. As we know from the slide here, we do remain committed to a plant turnaround given the opportunities in China that James will comment further on. We are currently assessing the most effective way to improve the rate-linking step for the Panjin plant, including what investments may be required to increase its operating capacity to take advantage of the long-term opportunities that we continue to see. I will also ask that any future investments to realize its full potential would be expected to be delivered within our mid-term guidance for annual capital expenditure of 8% to 10% of revenues. Going to the other two areas where we will see exceptional items coming through this year on the right-hand side of the chart of this slide. Firstly, on portfolio simplification, we are looking to rationalize and simplify some of our portfolio and specific programs and anticipate up to 10 million pounds cost associated with this for the full year. These would be non-cash. Secondly, on restructuring and reorganization, James will cover more on the actions we have been proactively taking so far this year, but we anticipate the headcount reduction and other actions will result in up to 10 million pounds of costs on a full year basis, as previously guided. These will be predominantly cash items. At the half year, we have incurred 2.4 million pounds of exceptional items associated with restructuring. In terms of guidance for the full year, we note in our announcement today, the total exceptional items for the year are anticipated to be in the range of 75 to 85 million pounds. The non-cash China internment accounted for the majority of this charge. Thank you. And I'll now hand back to James.

Thank you, Ian.