Victrex plc

So. Good morning, everyone, and welcome to the Victrex's Full Year Results Presentation for 2019.

Myself, Richard, and Martin, our Chief Commercial Officer here today to cover the results. I want to take the opportunity as well to thank Tim Cooper, formerly our Executive Director for Industrial for his contributions to Victrex over the year.

He retired in September is properly enjoying the mountains in Latin America these days, but closely following Central United at the same time, so all pleasure around him. Martin now oversees the two P&Ls our industrial and medical and will answer questions in that capacity today.

So briefly turning to the highlights, sales volume for the year were 15% down broadly in line with expectations. We saw the run rate stabilizing in Q4, Q4 was an easier comparative compared to last year.

And we came out of Q3 through Q4 with a run rate of 3% in the positive. So Q4, as I said was still 5%, down year-on-year.

The year was a tale of two stories if you wish. It's well documented that we were impacted by cyclicality in a couple of our sectors much as many companies in our industry.

We did see cyclical impact in auto and electronics. But on the positive side, we did see growth in aerospace, in medical and oil and gas.

Remember also that both auto and electronics feature heavily in the mix for a value added resellers channel. So overall, auto and electronics represents roughly 50% of our volume as we stand today.

We have seen some recent signs of stability in these markets, automotive and electronics and that’s pleasing. And still remain cautious in these markets, at least for the time being.

And I'll come to the outlook for those a little bit later in the presentation. It's also worth remembering that we have only seen a couple of months of trading in the new financial year.

So our Q1 update in February we’ll shed much more color on the prospects for both of these key market as we head into our new financial year. As I said, I'll talk a little bit more about medical later.

However, we did see great performance there with revenue up 4% year-on-year. And 100% growth -- more than 100% growth in China, which is now featuring prominently in our portfolio, with a lot of exciting opportunities.

On the mega programs, we did see further progress embedded in the long-term alliance with Airbus, more development programs coming on to the books in gears and double digit growth for HA Enhanced product for the spinal area. Richard will cover the financial section shortly, but one area to call out specifically is that we have continue to invest in the business in FY 2019, we have invested in both front 3D technology and Surface Generation helping to support our Polymer & Parts strategy.

And we've really been using the time to prepare for the ultimate uptick in the markets that we serve, we’ll be using the time well, but for the financial details I'll hand it over to Richard.

Thank you, Jakob. Good morning, everyone.

So let me start with just the financial highlights. So for financial year 2019 ending 30th of September, our sales volume declined by 15%, which is a fall of 656 tons, around 170 tons of this was due to the significant consumer electronics contract that had substantially been filled in the previous year giving an underlying decline of 12%.

The balance was primarily due to the weaknesses in the automotive and electronics end market that we and many others have commented on throughout the year along with the associated impact on our Value Added Resellers. We should note that we did achieve some growth in other sectors despite the economic environment, most notably in aerospace, energy and medical.

As noted in our statements we're seeing some signs of stability in automotive and electronics, but we're retaining a cautious stance for now and are assuming that these markets remain somewhat soft at least for the first half of financial year 2020. Revenue declined 11% to £194 million.

Gross profit declined by 15% to £276.3 million or by 14% on a constant-currency basis. Overheads reduced by £10.4 million, driven by a reduction in bonus accruals of £13.5 million, partly offset by a small additional investment in R&D and sales.

We also continue to treat acquisition-related expenditure is exceptional with £1.5 million incurred in the year. We should note that the expected pension adjustment in relation to GMP equalization that we flagged at the half-year actually turned out to be immaterial once it manifest by our actuary [ph].

Our underlying profit before tax and earnings per share declined by 17%, our effective tax rate of 11.8% was in line with our expected long run average and marginally better than last year. A final dividend of 46.1p has been proposed to give a regular dividend for the year 59.6p again in line with last year.

The special dividend has not been proposed. So looking at the year-on-year decline in profit before tax in a little more detail, we can see that the decline was driven by lower sales primarily with both the weaknesses in our industrial markets and the conclusion of the Consumer Electronics contract resulting in a reduction of £26 million in gross margin.

We did experience a currency and inflation headwind of nearly £7 million as expected. And we did make modest investments in new manufacturing capacity for our parts businesses and in sales and R&D.

However these cost increases were more than offset by the lower bonus accrual. As noted our markets do remain uncertain even as some stability has returned to automotive and electronics, we are therefore cautious about our outlook.

But with a small net tailwind from currency and inflation and careful control of overheads we do expect to be able to make some progress during the financial year 2020. If I look at pricing and margin in a little more detail our average selling price was £78 per kilo.

This was about 4.4% higher than last year. Around one-third of this improvement was due to currency, but the main contributor was the mix benefit of growth in medical, combined with the decline in industrial as well as the lower volumes from the Consumer Electronics contract, underlying pricing was broadly stable.

Despite the higher average selling price margin declined by 3.8 percentage points to 60% around 2 percentage points of decline is due to the adoption of IFRS 9 which I will come back to with a balanced use of raw material inflation and a small impact from lower production volumes on overhead recovery. Looking forward, we are expecting to benefit from a modest tailwind from currency in FY2020, but for this to be partly offset by raw material and wage inflation.

We expect gross margins for FY2020 to be in line with FY2019. It's also worth just commenting on the decline in Medical gross margin that you will see from our statement.

This was due to a combination of weaker mix, with our growth having been primarily in non-spine products. And some start-up costs that we reported in the first half in relation to the use of a new toll manufacturer.

So looking at currency, shown again the impact of the move to IFRS 9 as this is the first full reporting period following the change, as required by the standards the individual line items are recorded as a weighted average spot rate. Because we hedge net cash flows we're then required to show the gain or loss on forward contracts as a separate line item on the face of the P&L and we chose to show some gross margin.

This is a loss of £5.9 million for the full year and it is this change in presentation which drove the 2% decline in gross margin. As you can see the weighted average spot rates were slightly favorable for the year, which overall had the effect of giving a net PBT headwind of £3.9 million.

Looking forward to FY 2020, we’re circa 80% hedged per our hedging policy, as a consequence are expecting exchange rates slightly more favorable to FY 2019 to give a potential tailwind in the region of £6 million to £8 million. We are in the early stages of reviewing our hedging policy haven't realized that this is probably not always given our investors as much clarity as it was intended to do.

We did however feel that contemplating a policy change in the middle of the Brexit uncertainty was probably not going to be helpful. So we are going to return to this review and conclude it during financial year 2020.

Things worth commenting on our inventory movements and in the first instance and as we have reported previously, we have invested an additional £20 million in finished goods inventory to provide a contingency against any Brexit related disruption. We have now in excessive 12 weeks finished goods inventory outside the UK and we are successfully operating a new warehouse in Germany to provide additional security for our European customers.

In the course of doing this, we have run our raw material inventories to a slightly lower level than indented. So we do expect a further small increase in overall inventory by March 2020 as we replenish those raw materials stocks.

The combination of holding these inventories and weaker market demand is giving us a window of opportunity to debottleneck our polymer production, which we will come on to. We therefore do not intend to start winding down inventories until later in FY 2020 and into FY 2021.

So speaking of debottlenecking, we have previously noted that we've found a way to increase our polymer capacity in a number of incremental steps that will be more capital efficient than jumping straight to another full-scale part of plant investment. We have now decided to progress with the next step in financial year 2020, which is to carry out the anticipated debottlenecking in Hillhouse.

The capital costs will be slightly better than we had anticipated at around £15 million. And we expect overall to unlock about 800 to 1,000 tons of additional capacity.

The project will require an extended shutdown mainly in FY 2020, which will lead to a period of unrecovered fixed manufacturing overheads, which is the main contributor to our expected exceptional challenge, which will be in the region of £10 million to £12 million for the year. This also includes the provision of around £2 million of costs in relations of our ongoing M&A activity.

We will to some extent absorb the capital costs of the debottlenecking in our routine capital expenditure budgets, which averages around 6% of sales. And as a result we would expect total CapEx in FY 2020 to be in the region of £30 million to £35 million, but then to return to normal levels in FY 2021.

We will then continue to look at opportunities for further incremental investments, including those outside the UK, as well as inorganic options. With further debottlenecking in the U.K.

were to be identified it is unlikely there's any expenditure would be before financial year 2022. The priority for our use of cash therefore remains investment behind our growth strategy.

This more phased approach to capacity expansion thus provide the opportunity for Victrex to continue to provide attractive returns to shareholders. So finally, if I just finish on cash, our cash generated from operations has primarily been impacted by the inventory build, which has brought cash conversion below 100%.

Capital expenditure was £22.7 million roughly in line with our long run average. This expenditure did include a number of investments in new manufacturing capacity for our parts businesses.

We announced earlier in the year our investments in additive manufacturing technology through Bond 3D and in advanced injection molding capabilities via Surface Generation Limited. Stage payments to date have totaled £11.8 million.

As a consequence of the above, our closing cash balance was £72.8 million. This is below the threshold for a special dividend we recommended.

Whereas we do anticipate operating cash conversion to return to in excess of 100% during FY 2020, it should be noted that we also expect to make further £8 million of stage payments in related to those investments. And we will be impacted by the change in tax payment rules for large companies, which will result in a total tax payment for the year of around £22 million.

Thank you. I now hand back to Jakob.

So thanks, Richard. And on to business performance with despite the headline performance, did have some positive points in a number of different markets.

If we start with automotive, as we talked about, we felt well publicized slowdown in automotive from the worldwide flight testing protocols, along with demand slowdown both in Europe and China. We’re probably disproportionately exposed to both European carmakers, as well as some of the high end cars so the impact probably has felt and felt a bit stronger in our portfolio than the average numbers would indicate.

Destocking obviously impacted the supply chain heavily during this period. As you would know PEEK is a high value product.

And we’ll probably always see a destocking impact relatively early on in a cycle. But on the flip side, when you come out of a cycle, you'll see the impact relatively early on as well.

It is clear from our conversations with Value Added Resellers, as an example, that have a high exposure to both automotive and electronics that the supply chain is running pretty dry these days, and that sort of emerges in volatility in order patterns. So, we certainly like I said before felt the impact of that early on in the cycle.

Full year volumes for auto were down 12%, which was similar to the 11% decline seen during the first half, so really no improvement as the year progressed. We also know that the IHS now forecast a 6% decline for the calendar year 2019.

And that has sort of progressively been adjusted downwards as the year has progressed in a painful manner admittedly. But they are now at this point in time, looking towards roughly a flat growth year in 2020.

On a more positive note, we have some -- we have seen some stability during the first month of trading in a financial year 2020. But I would say that it's too early to call that an improvement yet.

And despite weaker comparatives, we're assuming a flat first half in auto. I'll come back in a little bit and discuss gears specifically.

But I do also want to note that on electric vehicles we now have a range of development programs in place globally, including development partners in China. On Aerospace, we did see 5% volume growth in FY 2019, first half had a tough comparatives with FY 2018.

So it masked a little bit the growth that was underlying in the segment, but that growth really came apparent in the second half when we saw an 11% growth. We have been supported obviously by increased plane built and our new TxV facility as well.

The 77x [ph] is expected to start deliveries in 2020. And we expect to have content on that plane too.

However, we note that there is a slight decline in 787 plane built. And we have some significant volumes in those planes actually.

Our AE250 polymer, our low-melt PAEK continues to get a great reception. This is actually now a patented product and actually one of our 200 patent state portfolio that are in place or pending our composite based on AE250 is getting great reviews as well setting the standard of the industry and is one of the areas of focus in the Airbus development program.

On energy, under energy we report both energy and manufacturing and engineering. Energy itself had a relatively good year, although the segment itself had only -- was down 1% overall.

Oil and gas itself was up 6% in spite of rig count sort of weakening over the recent months and shipping out in Magma, which remember had in excess of £1 million in sales in 2018. If you adjust for Magma then energy was up 9%.

We do know that onshore tends to be weighted towards our products in examples like steering, valves and pumps, but also offshore exploration in the form of electric connectors and support for down hole tools. Given the inward nature of PEEK, I will cover Magma in a separate slide.

We remain very positive about the prospects for Magma. But here the focus is very much on preparing for the Libra bit in 2021 and qualifications associated with that.

Turning to Electronics, we had a tough year here, driven by both semiconductor and consumer smartphone applications. I think the latest statistics on the semiconductor association reported sales of semiconductors down 16% to the end of September 2019.

Victrex has obviously exposure both to the CapEx side of this business, as well as the OpEx side in various forms. I think the overall outlook for the year of that industry is forecasted to be down around 13%.

We would note though that the latest semiconductor statistics out this week showed an improvement forecasting around 6% market growth in 2020. As Richard, talked about before the large smartphone contract wound down to negative volumes this year, compared to 200 tons last year and that clearly impacted our accounts for the year.

But stripping out this impact electronic volume was down 11%. So in line with the broader industry if you wish.

We did see growth in home appliances, whilst the undisclosed consumer device application saw some volume come back, mainly in the second half. We continue to work on some opportunities in 5G.

And -- but through FY 2020, we should assume that we would have fully exhausted the large consumer electronic contract that has been frequent source of reference and comparison in previous years. Value Added Resellers volume down 17% year-on-year still challenging in these markets despite more favorable comparatives, but the VAR channels are obviously very important for us long-standing relationships with a number of key players there.

But we have seen compounders and stock shape companies both been impacted obviously by auto and electronics slowdown as mentioned before. Noting however though and as I said before emerging in the volatile order patterns that the downstream supply chain seem to be pretty dry.

And remember this is a continuing chain, it goes from compounders and stock shapes into distribution into millers, into Tier 1s and then sometimes into the OEMs at the end. So it is a long chain, but the consensus is that it's running pretty dry as we speak.

Moving onto gears, we did refer to it in an announcement in July that we had a contract with U.S. OEM that has now been rescoped.

It's one of several programs that we have with that customer continue to be excited about the range of opportunities. And on this slide I'm just showing the different kinds of applications for gears when it goes into countries hybrid actuators, oil or water pump, mass balance gears, turbo accelerators, heat adjustments, SGR pumps.

But the bottom-line is here that the value proposition remains strong. Remember that we already got a number of gears or gear applications on the road already one with a large German one, and two other ones as well.

So strong value proposition, driven by the need for lesser vibration and reduction in noise, but also supporting light-weighting and faster processing capabilities. This is just to give you a rough overview of where we are in terms of the pipeline.

So as I said, three contracts already in place, more than 10 development programs on the timeline as indicated above there. And remember that it’s only four years since we acquired Kleiss Gears.

So we've come a long way since then. We've invested capacity.

We've invested in capacity at the site in FY 2019 as Richard mentioned before and recent important milestone there where the site achieved the IATF classification of 6949 basically making it fit-for-purpose for supplying automotive. And if we look out midterm, we continue to see the opportunity for multi-million pounds of revenues by converting one or two of these programs into commercialization.

So within a period of the next two years we should see more than meaningful revenue from Gears coming our way. We also see opportunity for Gears outside of automotive.

Our manufacturing and engineering team is already working on a number of programs for Gears in various applications, for the capability and we have acquired there for designing and engineering and executing is really boding well for us in the near future. Turning to Aerospace and our Loaded Brackets mega program, we completed our U.S.

manufacturing facility in Rhode Island. We have been shipping our first commercial orders in the form of seed pans and so far we have made over 2,000 of them and shipped away.

Our composites are based on a low-melt PAEK which is patented and composites tape being very well received by the industry, as I mentioned in my opening comments. Remember that this product helps us to process the part quicker, which is obviously a key driver for the Aerospace industry.

And we would expect to deliver meaningful revenue out of the rollout add-on facility already in the financial you 2020. Now our foray into the development of AE250 for tape, our foray into making our own tape, our foray into making Loaded Brackets based on hybrid composite technology has also opened up another mega program for us.

Aerospace Structures, if we keep in mind that new aircrafts are now over 50% made out of composites, but nowadays are mainly made out of thermoset composites. However thermoplastic composites where part can be made in minutes and don't require any auto class for curing of different layers are projected now to grow at above 10% average CAGR through 2025.

Key drivers for that are obviously the need for speed in production in the industry, with a long backlog that we see with the large OEMs that are getting close to 10 years now for single aeroplanes. There is a need to speed up manufacturing and thermoplastic certainly seem to open up the avenue for that.

So the technology platform that we have invested in based AE250 carbon reinforced tape and in composite technology has opened up the avenue for us. And basically it's a key to us being a part of the alliance with Airbus around the Clean Sky 2 program.

So a significant opportunity for us going forward and we have actually defined it now as a new mega programs in our portfolio. Turning now to Magma.

As expected, we saw lower revenue this year. But we have been working very closely with TechnipFMC and Magma on getting the needed qualifications to be able to compete and bid for the Libra project in Brazil.

And I wanted to note that we don't just -- we're not just working with one partner on the journey towards Libra. We have other partners as well.

One through the hybrid flexible pipe with Technip, and then the other channel via Ocean Composites [ph] drives this technology as well. Both are based on the Magma pipe that are based again on our pipe extrusion technology and our composite tape, once again.

M-pipe has DNV industry standard qualifications already by now. And remember the value proposition is based on the fact that it's 90% lighter than steel in water H2S and CO2 resistant.

And has deployments actually already to date. So we remain very positive about the mid-term prospects for Magma with a focus in FY 2020 we will be on making further qualifications on the pipe qualification testing pipes to support Technip out in Brazil.

Turning to Medical, Medical is continuing to demonstrate the positive performance overall we saw in FY 2018. Revenues are up 4%.

Asia was particularly strong with the growth of -- in excess of 79% and China specifically up more than 120%. China clearly the largest healthcare market for the future.

So the traction that we're getting there is quite exciting for us. U.S.

revenue, however, was down 7% on spine, still a tough market that has suffered from price pressure on the back of consolidation. And growth outside of the U.S., growth outside of spine, spine in U.S.

becoming more stable basically gives us an optimistic outlook for the coming year. On dental, we're doing more here to drive adoption.

It is the most fragmented end market in medical that we're dealing with and getting traction on it has been a challenge admittedly. But the clinical evidence base is getting stronger, the more data that we generate, and the new study for the Malo Clinic covering at the three year data point basically showed clinical benefits like 4 times less bone loss using PEEK in prosthetics, than the comparative metal-based materials.

So the shock absorbing properties of PEEK these application seem to be a real value. So the clinical value proposition is really clear.

The commercial value proposition is quite compelling. Our traction -- our challenge remained in getting traction in adaptation.

And to that end, we're looking to sign up a greater number of partners at different levels in the supply chain to further advance in that area. In trauma, we’ll say more on trauma and FY 2020.

But now, we are collaborating with one of the top five players in the industry. And we're planning to add capacity to that being ready to meet ultimate scaled up demand.

Our knee patient recruitment continues. And we do expect the first implant to be in shortly.

The focus for FY 2020 is delivering a safe trial with outcomes in FY 2021-22 and then on the back of that being ready to commercialize PEEK based knee. Further on medical.

Our first generation in spine was obviously PEEK-OPTIMA. And we sort of talk about it as spine 1.0.

In spine 2.0 which is the enhanced version which provides better bone on growth, we presently saw a double-digit growth in 2019. We've got excellent clinical evidence that supports the better bone on growth.

And on the back of that, we're getting the penetration for HA. You may actually have seen during the year the Tiger Woods implant that was made by Centinel Spine was actually based on our PEEK.

We're seeing a good impact on the sales mix too as we get further penetration with HA Enhanced. It is a premium product with higher margin.

But we're also working on Spinal Generation 3.0, which is going to be based on Porous PEEK, supporting still better bone in growth after surgery. And we see huge opportunities in 3D printing area here.

And our acquisition of our share in Bond earlier in the year was really one of the key enabling factors we wanted to line up in order to be able to develop this product category. So on Bond specifically, we're pioneering here PEEK in the space of 3D printing.

Remember one of the greatest challenges in 3D printing and PEEK is to get to see directional strength adequately close to what is the norm. In terms of mechanical strength in 3D printed versus molded products.

We will once a number of milestones performance -- once a number of performance milestones are completed, probably have invested in Bond and Surface Generation to the tune of £20 million. But as Richard noted, and I'm emphasizing it is performance based, which could lead to payments up to close to £8 million in FY 2020.

Through bond we've actually also acquired the exclusivity in medical spine cases. And as I said before which is probably one of the Holy Grails when it comes to medical spinal cases.

And we would expect that to be a market leading solution in the market once commercialized. The uniqueness of Bond is that written 3D print with existing grades of PEEK, which clearly catalyzes the avenue for adoption.

So fantastic progress and we'll keep you updated on that as we go through this year. On Medical again non-spine, good progress there and good opportunity for single-digit millions of incremental growth over the next three years.

One area to highlight here is CMS cranio-maxillofacial applications. So skull [ph] plates made from PEEK.

Remember that PEEK is very invert great mechanical strength and has already been proven in over 9 million patients globally. CM area is a great area of growth for us we've delivered double-digit growth in FY 2019 out in Asia, in particularly.

And this is now in excess of £5 million in revenue. Fantastic clinical benefit as demonstrated recently in a paper by Dr.

Zhang, for World Neurosurgeon that looked at brain function for over two years post-surgery showing an improvement of over 25% using PEEK versus 11% using titanium. So great clinical benefit once again from using PEEK.

We also know that cosmetics satisfaction was improved meaning much lesser -- much lower reoperation rate. And sometimes when you read about brain function and you hear the France President talking about certain organizations being brain dead you wonder where the CMS might have a role to play there.

But that's a different conversation. So moving onto the mega programs ever so briefly, main movers are in aerospace, reflecting the fact that we now have the Rhode Island facility operating and we're shipping parts and products out of that facility HA Enhanced clearly featuring there as well given the double-digit growth that we saw this year, we have introduced a new mega program Aerospace Structures.

Surely enough we don't anticipate revenues or significant revenues from that in the next three to five years. We will get some revenues from that through all kinds of testing and testing applications, but it is worthy a bubble on the famous charts by now.

And we will keep you updated on that on a regular basis as we go forward. Dental, clearly, we moved that back a little bit.

So reflecting the challenges in adoption and on Gears we’ve also moved that back a little bit reflecting the re-scoping of the U.S. contract but still the same good and excellent midterm prospects in the Gear area.

On the pipeline milestones I am not going to go through each of these, but these could be a useful reference. As you hold us accountable when we progress through the year and a good reference focus I won't cover in detail as I said, but it's worth to mention aerospace brackets and composites where we expect meaningful revenue in FY 2020.

And I also make a reference to HA Enhanced where we are anticipating further progress with a top 10 device company in FY 2020, which will have an impact on our revenues in that area. Turning then to the outlook, overall, we anticipate a flattish first half volume wise, it is early in the year.

So we will come back to you in our February statements with a better view of how we see the year sort of pan out. Good English friend of mine told me that one swallow doesn't make a summer.

And I think that's probably a very prudent word of advice these days whilst we see things stabilizing. It's too early to call any improvement in the key sectors that have impacted us, so we are approaching the year with caution.

We note that full year consensus volume expects us to grow roughly 5% and I would assume then there's an improvement in the second half. Remember that our exit rate coming out of Q4 was only around 3% volume growth, sequentially against a tough Q3.

We can't guide on the second half yet and as I said we remain very cautious on auto, particularly and obviously on Electronics as well. Although all statistics would tell you that electronics should see a recovery in 2020.

Still see continued growth in Aero and Medical. And on Energy we are neutral, reflecting the fact that rig count has been coming down over recent months.

So, in summary, we've seen the cyclical impact and the weakness that has impacted us in FY 2019 in auto and electronics and obviously having impact to the VAR channel as well. We are seeing those markets starting to stabilize, but we're staying cautious for the time being.

The mega programs we should expect further progress particularly in Aerospace and Medical. We are still highly cash generative, but lower this year due to the Brexit inventory built and the support for the debottlenecking project.

Overall, we're budgeting for constant currency growth in FY 2020 despite some additional costs from bonus accrual and limited front end investment and cost inflation. Currency is also a tailwind in FY 2020, which provides some benefits to the bottom line as Richard mentioned before.

I'd also like to emphasize that in spite of the short-term headwinds, the core of our value proposition remains unchanged. So we’re positive about medium term growth prospects.

And we feel that we've got a very healthy pipeline of both shorter term and longer term growth projects. Finally, we continue to invest in our business, both in downstream investments to support adoption of PEEK in the various applications.

But also, as evidenced in the investment in a capacity roadmap, which is a bit different than we might have thought about it a few months ago or a few quarters ago. And we now have seen a path forward to add capacity in more incremental steps.

But very cost effectively, in an independent way, if you wish. And the first phase of that will be undertaken during this current financial year.

So all-in-all tough year behind us, stability seems to have headed in, we are navigating the situation carefully as you would. And as you would expect from us in terms of control over expenses, we're very mindful of the fact that we don't want to do anything to that effect that adds to the critical path of our key growth programs.

So we make sure that we continue to resource them to entitlement. But in general, we are making sure that we use the little bit of a break in demand or a downturn in demand to get the team [indiscernible] ready again, when the uptick will return and we’re convinced that it will return, it's just a matter of time.

And we're focused on maintaining cost control during the period, but also making sure that we've come out this recessionary period fitter than we went into it. Thank you.

And we open up now for questions.

Good morning Jarek Pominkiewicz from Jefferies. Quick question on aerospace, you did very well in the second half with growth of 11% despite the step down in 737 production rates.

What could be the impact for 2020? Should we see the production rates to remain at the current level?

So we're -- our view is that they're starting to think about reshipping that as being new. So they're going to ship the product so we think it's unlikely they're going to stop building.

Thank you. Charlie Webb, Morgan Stanley.

Just on understanding the exceptional pattern a little bit more detail. Can you try and help us understand what are these fixed costs that are effectively unrecoverable?

And just trying to gauge that versus kind of stocking destocking effects, given it sounds like your volume -- your capacity next year will be lower year-on-year, given the debottlenecking measures, can you also tie that in, in terms of your sales volume expectations? Because obviously as you noted, consensus 5% growth, just understanding how the stocking, destocking effect is working?

I mean firstly, the consensus is probably a little on the high side. So our expectation is for low single digit sales growth.

If you think about our current production capacity, in FY 2019 we produced a little over 4,000 tons. We have a nameplate capacity of 7,000 tons.

But we've always said that our effective capacity taking account of our product mix and some bottlenecks in the process is probably about 6,000 tons. The fixed cost base or the cost base that we have is good for 4,000 to 4,500 tons and that cost base is people and all the other overheads that you'd expect to find in manufacturing.

So in order to affect this shutdown we need to take out about 20% of the capacity, by which I mean 20% of 4,000 to 4,500 tons. So that leaves about 20% of the associated costs unrecovered.

It's not all fixed, although fixed costs are relatively high proportion. But the key point, the really key point is that we don't wish to reduce our labor cost during that period.

And the reason for that is that our manufacturing workforce is highly skilled technically oriented very, very well experienced and essential to the good operating of our manufacturing. And therefore for the sake of a shutdown we would not be taking people out.

We will redeploy them on training and to assist with the debottlenecking activities. Therefore to all intents and purposes the vast majority of that cost base associated with producing 4,000 to 4,500 tons is fixed.

And therefore you can envisage that we’re taking about 20% of that out there is a significant under recovery of our costs. Does that make sense?

Just in terms of tying that to the fact that you think you're going to grow your sales volumes. Does that not mean you've grown your I guess finished goods inventory up into that event you then going to work it down through that period of doing debottlenecking.

And I understand obviously you expect working capital to kind of continue to move higher, but just understanding the finished goods piece because obviously you’d absorb more fixed-costs building that up working through it to maintain volumes broadly stable through the year or up small up through the year. Just trying to understand that because it seems to be a stocking event as opposed to anything else, et cetera.

Yes, I can understand why you asked that, the reduction in finished goods stock during the period of FY 2020 is going to be fairly minimal. Because we need to -- whilst we have several polymer manufacturing streams in the UK and we are only taking one of them into a shutdown to enable the debottlenecking take place.

So we have other polymers streams that will carry on producing to give security of supply to our customers. But nonetheless we're also going to hold the majority of finished goods stocks during the period.

Hence why a meaningful reduction in finished goods stock will not happen until financial year 2021.

Okay. And then sorry just second one, can you just help us with the bridge for next year.

So you have that £10 million headwind exceptional from the initial fixed costs £7 million in the midpoint on FX just on the other kind of moving items the I guess additional admin costs, the bonus accrual just understanding what your kind of today view on that would be helpful.

Yes, I think you can view this fairly simply in a way. So I indicated that the currency tailwind would be in the region of £6 million to £8 million.

And you can assume that that will be offset by primarily in raw material inflation and a little bit of utility inflation, which accounts for about half of it. And then bonus accrual and small additional investments in operating overheads, which should account for the other half.

So you can sort of see a net pretty much zero between currency on the one hand and inflation and overheads on the other. And then anticipating low-single digit sales growth that then allows us to anticipate some growth in profit.

Okay. So reported profit around £100 million wouldn't be a many miles away.

It wouldn't be many miles away.

Okay, thank you. The medical business in Asia seem to be very strong, overall growth was 4%.

So why was the rest of the world weak?

Yes, so I think we've talked about this before there are couple of applications in which titanium has started to gain some share back, one is in particular products in spine, which is an expandable cage where PEEK is implicated, but not as heavily as it is in other structures. And that's because of the jacking mechanism in there PEEK is not strong enough to be providing the jacking mechanism.

And then the other area is in Porous PEEK where we're -- in porous structures where we talked about us having a new structure around bone-in growth associated with porous structures what Titanium already has that and there are 3D printed titanium porous structures. And we've seen particularly in the U.S.

growth of that application over the last couple of years that starting to slow now, and people are beginning to talk about refreshing their PEEK portfolios because there are some significant offsets of using titanium instead of PEEK in terms of bone loss around the surgery space. So, it's basically titanium in those two applications.

And you're right, there's a weakness -- a weaker performance in those areas offsetting the growth in Asia.

Chetan from JPMorgan. Few questions.

Firstly on PEEK Gears, with sort of bubble being moved to the right, can you maybe talk about how do you think about the incremental sales associated with that project or projects in the current year, fiscal year 2020? Second question is, if you compare what you are seeing now in say automotive stabilization versus, maybe at some point at the start of the year, we also thought there was some stabilization.

How would you characterize what you're seeing now versus what was the situation maybe you say at the start of the year? And maybe, if I can just maybe follow-up with the last question would be on exceptionals, historically Victrex's numbers used to be pretty clean, not many exceptionals reported numbers are what it is.

Is that going to change in the future, are we going to have these exceptionals becoming more recurring to some extent in the future?

So why don't we split this into -- I'll take the first two, you start with the third one on exceptional. Richard?

Chetan, that's a good question. We have no intention of following into the trap of identifying some major kind of cost every year and preparing them as exceptional year-in year-out.

Because I think we get the point that those are not exceptional, we’re two things. We are cutting out M&A costs because they will come and go.

And to be honest if we're incurring M&A costs in one year and maintenance for two years and then nothing in the third year you're going to ask what those are anyone, so we're making it visible. I think the same true of this particular debottlenecking related costs and thought process was very straightforward.

It said given this is a highly unusual one-off in the sense that you are only going to do this very, very infrequently. We're going to have to call this out and explain what it is.

And therefore we may as well label this clearly on the face of our reports as an exceptional costs, but we have also said that this particular project is a one year costs. And that's what we intend to do.

So I will take the other two. So on Gears, we have moved it back and it's primarily reflecting the fact that we are expected significant revenues from a particular contract in the financial year 2020.

That contract is actually one of several programs that we’re working on with that specific OEM. That program ended up being rescoped at the last minute, even after we had received a purchase order for the business.

And because of that rescoping which basically evolved around the fact that the customer wanted a single solution that they could deploy to the whole platform. The scope of our work up until then had addressed 90% of the platform.

But it would have required them to have two solutions to the issues that we're solving. The fact that the taste to scope to 100%.

So going for a single solution that applied to the whole platform basically left that PEEK was out of scope for that 10% and therefore was taken out at the expense of metal. Sure enough that's not an ideal situation, but this tends to happen.

Like I said we had received the PO and this is only one of four programs that we have with them. So we're trying to turn it into a situation where it only strengthens the relationship as opposed to anything else.

So that's reflecting the move backwards in Gears. But in no way has it impacted I think the overall value proposition for gears in that area.

As evidenced by the number of programs that we now have on the books and as evidenced by the progress of all the other programs that we have with that particular OEM. On the outlook then, yes, I sort of alluded to it in my comments before that we saw market forecast being cut down in too many cuts throughout the year 2019.

And sure enough, we use those kinds of forecasts as an element of our outlook. It's not the single one, obviously.

But it is something that we always use as a benchmark and as a certain base in our forecast. So that obviously serves as a part of the explanation why we were relatively optimistic in the -- or not as pessimistic as the reality turned out to be in the early part of last year.

Plus, we expect it certain launches to be able to make up for any general market decline. It did turn out that the market did not improve at all during the year it further deteriorated.

Sure enough, the reason for that are well documented, the worldwide light testing protocols clearly was the first impact factor. Then secondly, you have the generation changes from environmental standard five to six in China coming shortly on the back of that.

And then you have the regular volatility introduced by the so called world leaders that has been impacting the automotive sector and the fallout from the China-U.S. trade relations impacting the industry, as well.

Now, WTF is I think largely behind us. Generation changes in China, from what I heard on my last visit there recently, are sort of largely being funneled through the system.

Still pretty high inventory levels of cars in the chain. And probably that's a big factor of the statistical forecasting companies now seeing a relatively flat auto for 2020.

Remember also and keep in mind that in previous years our gearing in this business, no unintended, it has been anywhere between 2x and 4x market growth. And one thing which turned to stability, there's no reason to expect why it wouldn't show the same year and going forward.

Maybe can I follow up one question on the inventory side of things? With or without Brexit, hard Brexit do you think structurally now you will probably won't need to hold high inventory than in the past.

Or would you say it could revert back to the historical levels of £60 million to £70 million plus minus in the future.

I think by the time it comes to move, it will move back. I think by the time it comes to that clearly, we would expect sales to be higher.

So think of that proportionally what the right number might be. But we definitely have a working capital opportunity.

We have put in the German warehouse. It is proven very popular.

So I suspect will carry a bit of extra inventory in Germany for service purposes for the long-term. So probably not quite down to where you might expect.

But yes, come FY 2021 and beyond yes, there is a working capital opportunity from that.

Good morning gentlemen. It's Maggie Schooley from Stifel.

Jakob, you mentioned that your approach to capacity is going to be incremental. I understand there are rationale for the immediate debottlenecking program.

But has the thought process changed further out that instead of going for several thousand tonne capacity expansions you will look for even smaller incremental extensions along the way? And given your nameplate capacity, how can you actually achieve that?

Yes, that's correct understood. I think if we put it in context it's about a year and half ago we've flagged the fact that at the end of our strategic planning timeframe we will see a need for additional capacity.

2023 we decided to flag it early because of the lead time involved in terms of building the new capacity based on the experience we had with TP-3 that came on stream in 2015. To sort of frame the capital investment associated with it, we refer to benchmarking estimates around TP-3 so roughly £19 million at the time for capacity of that scale.

Since then, we have identified opportunities to get at increased capacity that will allow us to meet the demand profile that we would expect to see in years to come in a more incremental and independent way. And which is even more importantly in a cheaper way than going for a large wholesale capacity addition.

So I think that'll obviously lead to smoother cash flow, a smoother impact on cash flow through the years going forward and the reduced cash requirement. So it is a good way to approach it.

And we will make sure to communicate that in due time as go forward. But you will not see these big swings in terms of cash use that you would normally have seen associated with a larger scale investment like we did in TP-3.

So I would encourage you to not think about the next TP-4 of the same magnitude, but rather see it coming forward in the incremental independent bits that Richard has now sort of already flat for the coming year and associated with the first phase of this and beyond.

Good morning, Sebastian Bray of Berenberg Bank, I have three questions, please. The first is with first two a more technical the third one a bit more philosophical.

The first is if FX rates were to remain as they are today am I right in saying that there would be a roughly £6 million to £7 million PBT headwind to be expected for FY 2021 the year after the next fiscal year? The second is on aerospace could you please provide a reminder of the major planes for which the PEEK loading is highest?

I think you mentioned the 787 Max, but what are the other big programs to keep an eye on? And is there any update on the A320neo?

The third one is on competition. I think the release today was the first one I've seen some time from Victrex that included a reference to various competition, there is still good scope to grow of.

So I'm paraphrasing but something like that. Could you perhaps give an idea if something has changed here and if competition from other PEEK producers or competition from other types of polymers is more what you tend to devote forward to?

Thank you.

So would you take the FX one first.

So when you say FX rate today what do you thinking of the U.S. dollar?

So simple answer to the question is, no that would not implying significant headwind and the reasons is this, this is by the way one reason we need to look at our hedging policy because it’s a really good example of why it doesn't necessarily do what we needed to do. So the headwinds in FY 2019 and therefore the tailwind coming into FY 2020 was actually driven because a portion of the hedging for FY 2019 was taken out in the first half of FY 2018 when the dollar at one point was up at $1.41.

So the average U.S. dollar effective rates for FY ‘19 in the first half was $1.37 and for the year it was $1.35, driven by what happened earlier on in FY 2018.

So expected effective rates for FY 2020 do actually have the dollar at about $1.28, $1.29. So for sure at $1.30 there would be a very small negative effect, but it's not the reversal of the £67 million that it might appear.

Totally understand why you had asked the question.

Sort of ready reckoner [ph] on planes so the 787 is about 1 ton. If we take the 350 it's about 800 kilos and if we take the 737-Max that’s 400 kilos.

So that you can bang that in your calculation that will be alright. And then in terms of the neo we're still working on that and we'll come forward with a broader update later.

And the last one was on competition and competition is no news in this industry as such, I mean we've had large multinational companies in this business for more than 10 years. So that's nothing new as such.

And the last thing we want to build into our organization is any complacency even if we feel that we have a leadership position with we can demonstrate by such. But the last thing you want to do is to be complacent about that.

In terms of alternative technologies, that's always a fluid situation if you wish. Particularly in industries that have a shorter development lifecycle and a shorter product lifecycle, where changes are more frequent.

It is not uncommon in that area or in that space like in electronics that in the beginning you might engineer for security. And then when you are looking for cost optimization you might choose to sacrifice some performance properties at the expense of a lower-cost.

But in general I would say sort of most of our segments are relatively viscous if you wish. They are conservative in nature we're going into critical application.

And where not necessarily a large proportion of the overall cost of the item that we're entering into and the superior range of performance properties whether it is chemical resistance, wear resistance. Thermal conductivity dimensional stability you could go on these unique set of confluencing property requirements are the reason why PEEK is selected above many other alternatives.

And that is the key reason why PEEK is sort of at the top of the performance polymer if you wish. So is that a static situation, no absolutely not.

Do we have to fight for business, absolutely. Do we have to be mindful of customer service levels, technical service levels, keeping on to innovate, absolutely.

There's no reason for complacency, but competition initially is nothing new. Oh sorry, I think you haven't had a chance to answer.

Thank you. Thank you for taking my second question.

Maybe I'm being a little bit dim on the production outage, but given that your finished goods inventory will not change at the end of the year versus the end of this year than your entire production for the year including what consensus bakes in slight growth will be effectively made in during the 2020. Would that mean that during the period of production you will have an over absorption of fixed costs that would then be compensated by the under-absorption over the period when the production stops.

No, certainly not the intention. I'm not quite sure what you're really asking that question, but to try and repeat it, we have a period in which we will be producing something like 20% less than normal capacity or normal production rate if you like the cost is predominantly fixed.

And therefore we're simply capturing the cost in -- the unrecovered costs in that period and attributing that to the exceptional.

Yes. But so in your profitability over the period where you do produce the volumes increase because you will end up producing slightly higher volumes than last year.

And over the period where you're producing your fixed costs will remain the same, but your volume monthly volumes should increase in order to arrive at the same volume number at the end of the year.

Yes, I guess, that would be right if we were to apply sort of differential costs and spending on different parts of the year, but then common with many other companies we set our standard cost at the start of the year and taking account in production across the year. And therefore if you will have a sort of average costs that is absorbed because we put the products in stock and we sell it, but was not until, because we're not incurring production to absorb that costs.

Thank you.

Thank you, good morning. Three questions, if I may.

Martin, just quick one the 777x wasn't on the list of aircraft. Can you give us the status to even if it's just relative to the 787 what your expected content is on?

Yes, I would take it between -- in the sort of 700 to 800 area.

Okay, thank you. And sticking with aerospace TxV I think the statement says 150 ton capacity for that new facility.

How do you expect so the utilization to ramp over the next two or three years?

Capacity I don't think is -- issue that in those terms I think what we can say with TxV that with the capacity that we have in there right now we should be able to deal with demand for the next three to four years at least, so that is pretty well invested already. So you shouldn't expect further capital expense there.

Thank you. And then a broader question feature the last 12-15, months has very much been about volatility in the monthly order patents and customers really sort of living hand-to-mouth, has that changed in any way with respect to this comment around stabilization?

It seems to be getting a little bit more stable, particularly outside of the VAR channels, VAR still a little bit volatile. And there's probably a number of factors that could explain that.

We're approaching year-end now for many of them in this quarter, with sort of a little bit of volatility. That volatility was extended last year.

But I think in the other markets, I think we'll see more stable order patterns. The volatility is still there in VAR side, I think very much attributable to the fact that the supply chain is still pretty dry, and still went pretty low.

And we're approaching year-end.

Thank you for taking my second question, my follow up questions. Firstly, just on the underlying pricing.

You noted broadly stable, just help us provide a bit of color maybe you have in the past. Just what's the underlying pricing done 2017 into FY 2018 into FY 2019?

Just a bit more granularity on what broadly stable means is it up, down or nearly stable level, that would be helpful. And then just one around auto, can you remind us what you guys sell into trucks, how important is trucks for PEEK there a market at all?

And therefore as we think about FY 2020 and show light duty vehicles, maybe we see a more flattish type setup, but it feels like trucks is certainly going to be softening. Is that a part of the business that you will be impacted by or not would be helpful.

I'll take the first a second one very quickly. Very limited exposure to trucks, it's all were mainly in passenger cars.

I think broadly stable means little flattish. So if you go back over four or five years, we've been very clear over time, but in the more traditional or the core part of the business, you can probably point to about 1% per annum underlying decline.

Just sort of more established applications have a little bit of price erosion. What does that meant in FY 2019 probably less than that.

And that's what broadly stable means. And therefore our outlook for pricing is sure in traditional applications, you can expect some gentle erosion over time.

But as we introduced newer applications that's the opportunity to equally introduce higher priced products and therefore broadly sustain average selling prices and margins over time.

Sorry. Maybe sneaking one more in on auto as well there, as you think about obviously you referenced IHS and their numbers.

I know, you did an [indiscernible] deal directly always with the OEMs you don’t always in all instances you have that visibility. But what is -- you talk about slightly better in your traditional part of your business slightly better or more consistent parts ordering patterns, what is the message you're hearing from the part producers, your direct customers that serve the automotive chain?

As they think about next year so rather than what the industry standards tell us, what do you see and what are your conversations kind of suggesting for next year?

Everybody's approaching the year with the same amount of caution and probably rightfully so, coming off a year where things are constantly being revised down, even if some of the major catalyst for that downturn seem to have sort of wash to the system. I think nonetheless, everybody's approaching it with a very cautious approach and probably rightfully so.

[Indiscernible] down.

No, no, I think people are generally expecting here flattish in terms of the today. No, I think people actually genuinely -- genuinely and generally expecting sort of a more stable outlook.

But I think, out there no matter whether you talk to the OEMs, the Tier 1s, the value added resellers. Nobody's really ready to bank on that yet, and that's probably understandable.

But everybody is sort of -- I think most of the forecast if you look at the forecast for the distance and the capacity, they are assuming a flattish market, with maybe slight positive growth year-on-year. And that's probably a prudent way to go until you see some further and a greater number of swallows.

Yes, I think you got to think about the situation that auto builders find themselves in at the moment, that whole industry, despite the underlying performances in total term on and that what the technology solution is. So everybody's keeping their supply chains really short.

They're thinking really carefully what they do on major costs and platform design, because they're just trying to work their way, everybody's trying to navigate to where it's going to end up. So it's really difficult for anybody to forecast anything in that space in that I think.

So I mean there will be volatility, but also people thinking much more cautiously and much more short term about what they're doing. And you got the other group who are thinking how do we moved into electrification and what does that look like for us?

So it is a tough space to be in at the moment for sure.

Anymore questions? Well, thanks for your engagement today and thanks for everybody that listened in on the phone as well and happy holiday season.