Victrex plc

So, good morning everyone, and welcome to Victrex's full-year results presentation for 2020. I'm Jakob Sigurdsson, and I'm joined here today by Richard Armitage, our CFO; and Andrew Hanson, Martin Court, our Chief Commercial Officer.

This is our second virtual meeting that we've held, after the one we had in May, at our half-year results. We're obviously sorry that we can't be with you in person, but hopefully come May, and midyear results we will have the opportunity to meet you in person again.

Firstly, a couple of housekeeping points, the slide presentation itself is on our Web site at www.victrexplc.com, under the Investors tab, and by clicking on Reports and Presentation you will find the presentation there. As we go through the presentation we will call out the slide number when we're speaking to a specific topic under our slide.

So, turning to slide three then, our key message today is that we are in a resilient financial position, with a strong growth pipeline which we're adding to, and we are meeting the milestone on our ability to commercialization for that pipeline, despite the COVID headwinds we saw in the second-half of 2020. So, while the trading was impacted by COVID, our cash generation was positive with an operating cash conversion of 101%, enabling us to underpin our growth investments and reinstate dividends.

I'll come back to both those points, and indeed behind the headline trading performance, there are either a number of access we have taken and/or positive developments in our position as well for the time when end markets seen some sustained improvement, getting closer to whatever will be the new normality, bearing in mind that we have seen a steady incremental improvement in several markets month-on-month, although overall performance remains subdued. On the whole, as we believe that Victrex has the opportunity to emerge stronger from COVID and in the long-term value proposition, an investment case remains clear.

We do see some incremental improvements emerging on the demand side these days. We have taken cost actions to support long-term operating leverage.

We have a strong pipeline that is progressing, and we are actually adding to it as well. We've got a set of sustainable products and technologies, and a strong ESG agenda, and last but not least, we have good cash generation supporting both growth and returns.

If we now move over to slide four, I want to talk a little bit about how we've approached the COVID situation itself, before we cover the financials and the headlines. Victrex has been very proactive during COVID, and consequently has been able to maintain a strong financial position and a strong growth pipeline, as well as assuring that the health, safety, and wellbeing of our people were at the highest priority.

Firstly, we did set up a central COVID committee very quickly in the pandemic to deliver guidance, monitor global cases in the regions where we operate, and to ensure regular communications with our teams, and for our people, we currently have over 70% of our employees homeworking, with only our U.K. and U.S.

manufacturing, and our Chinese technical center onsite as normal. So we're keeping in mind that the U.K.

government defines chemicals as an essential industry, and it was defined as life sustaining in several U.S. states.

Despite homeworking we have managed to operate very effectively with over 99% on-tine and in full deliveries in our supply chain for our customers since the onset of COVID-19. We've also supplied multiple customers with COVID-related applications, including ventilator equipment, and generated double-digit growth in this area.

For our communities, a very impressive response, we had employees who volunteered globally. We donated a significant amount of PPE and also made equipment for masks and ear protectors from one of our facilities.

Financially, we took appropriate actions to conserve cash, including deferring or de-bottlenecking project at Hillhouse and their interim dividend, and we remain in a healthy cash position. Richard will cover more detail on the financial position shortly.

We will now move over to slide five. Before we turn to the highlight, and while trading has obviously been very challenging through the second-half of 2020, we have had a number of very positive developments to help strengthen our business, which could easily be overlooked given the pandemic.

Importantly, we also continue in invest in our business and in our people with [technical difficulty] investment up £2 million year-on-year, and this includes our investments in systems and in IP. And I would like to cover these now, on slide six.

The clip you'll see also, our four company priorities focused around customer experience, accelerating innovation and the commercialization of our pipeline, operational excellence, and business excellence. Picking out some examples of how we strengthened our business through COVID, I'll name a few.

On innovation, our material annualized revenue now has increased by 9% versus 2019, and is in a strong position. This is essentially a measure of how our pipeline of sales and selling projects is growing, and it's encouraging to see this growth in around mostly our core business.

In our mega programs, 80% of our milestones were achieved during 2020, a great example of the innovative culture that we have at Victrex, further positive developments on the pathway to commercialization. On a cost management, it has been key for us this year, and we have addressed how we tackle the under-recovered overhead by reducing around 100 jobs mainly in the manufacturing of polymers, but also in our SG&A line, and this will enable us sustained savings and support long-term operating leverage demand sustainably returns.

In ESG and sustainability, we launched our new Vision goals, including a net carbon zero, which I'll comment later, but further progress in process improvements reduced water and waste, and one example is our [indiscernible] process, which has reduced effluents by 700 tons this year. On China, we announced our investment early in the year in a new facility which is progressing well, and will help underpin our growth in the area.

China has been a good area of growth for us for several years now [technical difficulty] indeed noting our last month's performance was around 20% higher in volumes year-on-year despite the pandemic. Growth is mainly coming from auto, electronics, and medical, where we recorded growth over the last five years, well ahead of market growth.

Overall, my message here is that we've not stepped back and just dealt with COVID, we have used the time well, and we've implemented a range of actions to deliver programs which will support us for the long return. Now, if we move to slide seven, and we look at the highlights, we reported our top line volume and revenue, back in October, and we did indeed see a significant impact of COVID in the second-half, with revenues down 23%.

It is worth noting that from the monthly declines of around 40% in Q3 versus the prior year, September, our monthly declines were down to around 20%, and in November, we ended up broadly in line with the prior year. So, undoubtedly, incremental improvement seen in the numbers, mainly around auto, electronics, and medical, we still know that aerospace and energy remain challenging.

We're also mindful of our tough first-half comparative. Our end markets overall remain subdued, so we need to see how the next months shape up first before we venture into making any predictions about the overall progress during FY'21.

Richard will cover the financials, but one area I would flag is that we ended broadly in line with consensus expectations, with earnings of around £75.5 mill of profit before tax. As this was a decline of 29% versus 2019, this does reflect our high fixed cost base and the drawable margin from under us through our progress, an area that we have been addressing.

I will come back and talk about our growth pipeline and the bubble chart later, but we continue to make some good progress there. On aerospace, despite the challenges of the market, we are operating in an easy area with high performance composite solutions.

We did deliver over £1 million of revenue from our new Loaded Brackets facility, on Rhode Island. And remember this covers brackets, but also seat pans and other applications and parts that fly on planes.

And we expect to continue that growth in 2021, reflecting the faster processing of PEEK-based composites. In e-motors, we're working on the next generation of opportunities, with now up to 10 e-motor programs in place, with commercialization expected from FY 2022.

And in Medical, we nearly doubled the revenue to £2m for HA Enhanced spine product despite the pandemic. The ability to continue investing is important, and our financial position has helped us this year with China, our main investment during the year in a new PEEK facility.

I will come back and talk about some of these areas in more detail, but will now hand it over to Richard for the financial overview. Richard?

Thank you, Jakob. Good morning, everybody.

So, I am going to start on chart eight with an overview of our results. So, following the solid first-half during which sales volume had grown by 5%, we have been affected by the impacts of COVID on our end market such that sales volume in the second-half was down 19% year-on-year to get a decline for the year as a whole of 7% to 3,492 tons.

This second-half impact was most pronounced in energy, aerospace, and automotive, together with medical which was impacted by widespread delays in scheduling of elected procedures. Revenue declined by 10% on a reported and constant currency basis to £266 million.

This includes a decline in medical revenue of 13% which has served to weaken our mix. The impact of which can be seen in our average selling price and gross margin.

Gross profit declined by 19% to £143.4 million or by 16% on a constant currency basis, reflecting a decline in gross margin of 650 basis points to 53.50%. Overheads reduced by £4.3 million as we reigned in expenditure as a response to COVID.

Exceptional cost comprises a charge of £10 million in relation to our cost reduction program and a further £2 million of acquisition related expenditure incurred in relations of our Chinese joint venture, our underlying profit before tax reduced by 29%. Our effective tax rate of 15.4% was impacted by the previously announced change to the U.K.

corporation tax assumptions. Our expected underlying rate remains in the 12 to 13% range.

As we come into the New Year, we have seen some sequential improvements in a number of our end markets, but we do expect some degree of volatility in our customer's order and patterns to continue. Bearing in mind that we are a late cycle business and that we were not materially impacted by COVID until June of this year, we note that consensus anticipates the volumes in FY'21 could be similar to those of FY'20 with some softness in the first-half compared with the prior year.

At this early stage, we think this consensus with volumes is reasonable, although we expect to have better visibility after Q1 IMS. Reflecting this initial outlook and resilient financial position, the Board had decided to reinstate dividend payments with a final dividend of £46.14 proposed for the year.

Moving on to chart nine, and looking at the year-on-year movements in PBT in more detail, we see first the effects of currency, which was [indiscernible] of £10 million. We have spent especially from year-over-year reduction overheads of £4 million as discretionary expenditure was curtailed with the onset of COVID.

There was also non-accrual for all employee bonus payment as in FY19. The decline in volume and weaker mix in the second-half had the affects of reducing profit by £26 million.

Turning to recovery in fixed manufacturing cost, we have mostly the first-half of our production volumes were approximately 20% down year-on-year and 16% below the associated sales volume as we prepared for our plan of de-bottlenecking project. As COVID took hold, we were able to reduce our onsite manufacturing personnel to the bare minimum, whilst utilizing our high stock levels to ensure we [technical difficulty] second-half, which was approximately 50% below the prior year.

To give production volumes for the year as whole, it was around 35% below prior year. As a consequence, the fixed manufacturing costs were under-recovered by £12 million.

We also incurred £4 million of inventory write-offs. Ordinarily, we are able to rework a high proportion of any surplus material through manufacturing.

However, with normal production volumes through the year, relatively this has been constrained and we have therefore taken some additional precautionary inventory provisions. Cost of sales also includes additional manufacturing cost associated with the buildup of production capacity from our past businesses labeled here as growth investment, and we have sustained our R&D expenditure at 6% of revenue.

Moving on to price and margin on chart 10 on average selling price was £76 pounds kilos 3% lower than last year. In the second-half, this was 5% below last year.

This movement is mainly due to mix, our industrial revenue was down 24% in the second-half, while medical was impacted by a sharp decline as Victrex procedures were deferred with revenue down 32%. Underlying pricing was probably stable.

Looking forward, we would expect a small improvement in average selling price as the proportion of medical business improves in the sales mix. We should note though, that volumes are recovering faster at the moment in our automotive and electronics markets.

So the expected movements in mix might be gradual. Gross margin declined from 60% to 53.5%, we should note particularly the decline in the second-half from 59.9% to 47.3%, which warrants some more detailed explanation on chart 11.

So, here we can see firstly, margin has moved between FY'16 and FY'19 which is a period in which gross margins declined from 63% to 60%. In fact, the biggest single impact was the presentational effects of adopting IFRS 9 that we reported here.

Aside from that, we can see a small decline as we have invested in capacity from past manufacturing businesses in the run-up to commercial production. This investment is critical to the delivery of our mega programs, and it allows us to open up new revenue streams.

While this investment will have a short, negative impact in the short-term, we're confident that these investments will help us to maintain and target return on capital in the medium-term. The combination of currency inflation resulted in a small increase over that period.

Certainly then the chart demonstrates the decline from 60% in FY'19 to 47.3% in the second-half of FY'20. The biggest impact has been the auto recovery fixed manufacturing costs of £12 million as I've already noted.

The additional inventory provisions accounted for a further decline of 2.7% and the weaker sales mix of 3.1%. These are effects that should substantially reverse once production volumes recover.

The combination of inflation currency gains and further investments in cost basis accounted for a further small decline. Looking forward, we have a nice de-bottlenecking program will be paused in response to our weaker short-term demand outlook.

Despite this, we expect production volumes in FY'21 to remain roughly in line with the prior-year, partly as a consequence of subdued demand and partly as a consequence of winding down our purchase inventory. The pace at which production volumes return to a more normalized run rate will therefore depends on the duration of any coronavirus implants.

We do expect some incremental improvements in gross margin this year as a consequence of the cost saving plan we announced over the summer, with approximately half of the £10 million savings relating to cost of sales. Over the medium-term, there will be some further investments in operating expense in relation to our past businesses and also a Chinese joint venture, but we do expect the negative effects we have seen on gross margin this year substantially to revert it, so if we move on to currency on charts well, we've again shown the treatments of currency in line with IFRS 9.

As before the individual line items are recorded as a weighted average spot rate the gain or loss on forward contracts is shown as a separate line item within gross profit. The loss on forward contract showed a £4.4 million improvement versus prior-year, which together with a £5.5 million improvement in the underlying weighted average rates gave a £10 million tailwind overall in line with our expectations.

This was primarily driven by effective U.S. dollar exchange rates of $1.27 compared to $1.35 in the prior-year.

Our expectation for FY'21 is for a headwind of approximately £2 million based on an expected and expected effect of the U.S. dollar rate of $1.28 and for the time being an assumption of this movement with the Euro.

We do know the potential for the Brexit outcomes, the results of the further weakening of Sterling but we remain highly covered for FY'20 bond, so this opportunity for upside this year. If I cover inventory also Brexit chance Thursday, first of all we can see the increase in inventory of £6 million since September 2019.

This increase is driven by an increase in raw material and work in progress, stocks and books were carried out to correct a significant shortfall in safety stocks that we reported a year-ago. This will include a substantial increase in the inventory of special rates with significant decline in unit volumes in the first-half of implant that advanced our de-bottlenecking project.

Finished goods inventory actually reduced by around 600 tons over the period, driven in part by the need to limit production during the second-half as a consequence of COVID. Despite that reduction, we expect to hold around 24 weeks of inventory globally by the 31st of December, with at least 16 weeks in each overseas warehouse.

I'm going to stress the point once more in addition to providing an important [technical difficulty] against Brexit disruption, this high level of inventory is serving us well, enabling us to maintain strong customer service levels despite having reduced mining at our key manufacturing sites to minimize risk to our employees. Once the Brexit risk is passed, we will bring inventories down fairly swiftly.

So we're expecting to see a working capital improvement this year of at least £10 million. Aside from our inventory contingency, we believe that we have prepared as far as possible for the impact of the end of the transition period.

Region registrations are important to us for which we're prepared with new findings ready for registration in Europe. And we're also ready to manage its replacements in the U.K.

Should we be in a position where tariffs applies to our exports into Europe, we'll also be prepared to seek mitigation of those tariffs, but we acknowledge that this could take some time. Moving on to capital investments on chart 14 in China, I'm pleased to report that our joint venture is progressing to plan.

As a reminder, this is a plan to invest £32 million in the new PEEK facility over three years in order to support our customers and our growth opportunities in the region. We do it as you might expect to experience some disruption in the early stages of the project whilst on U.K.

based engineering team was unable to travel to China. However, we have substantially caught-up and are on track for commissioning during 2022.

As you can see from the picture building and civil work is progressing well and we expect that phase to be completed by early next year. We have over 300 contractors on site and are steadily building-up our business team.

China continues to present a strong growth opportunity for us. Despite COVID we have seen a stable performance in 2020 and the opportunities for us working with existing and new customers continue to look highly attractive.

One, there will be a modest increase in capital spend as we're having to rely more heavily on local engineering resources during the periods of COVID disruption. Looking at Capital Investment more widely on chart 15, we have chosen their bottlenecking plans until we seek fairer and sustained signs of demand recovery.

This project is now unlikely to have a material financial impact in the current year and we will revert the decision as to when to carry out the project later in the year. As before, we have no current plans to invest in manufacturing capacity on the scale we have made historically.

By investing in smaller increments, we can take our investments to support our demand, which enables us to maintain return on capital around target levels over the medium-term. We do anticipate capital investments in China of the order of £25 to £30 million this year, together with other more received expenditure in the order of £20 million, we're expecting total investments this year on the duration of £40 million to £50 million.

Finally, on chart 16, looking at cash, we're pleased to report another good cash performance, which is despite the trading conditions gave us an operating cash conversion of 101%. Capital expenditure was in line with expectations of £24.9 million.

And we made further £7.8 million in stage payments in relation to our investments in past businesses. Following payments of a final dividend for FY'19 of £39.9 million, our cash outflow for the period was 1.1 million times.

Moving on to tax, our outflow increased £17.2 million compared to £10.9 million in the prior-year. This was a consequence of the new HMRC payment arrangements for large companies which resulted in six cash tax payments in the year rather than the previous call.

This will normalize in FY'21. The movements and other financial methods in the prior was £77.2 million reflects the underlying thing of cash on deposit, which enabled us to pay the 2018 special dividends in FY 2019.

Net cash at the end of the pay rate was £73.1 million. It should be noted that this increase £5.6 million referenced in our China JV, which will be £67.5 million available to the wider group.

We have continued to monitor a number of COVID contingency scenarios that measure the impacts on our customer's demands and the timing and shape of our recovery in our end markets. We've included consideration of a scenario in which no improvements in trading you seen as well in FY'21.

I am pleased to report with a no scenario to me, if this is running as cash or this point that we have visitation needing to slice on credit facilities, and at those stage in the past nine months that we utilized the government's emergency borrowing facilities, further schemes, or the subsidies. We therefore continue to believe that we have sufficient capital borrowing services and flexibility to be able to continue to manage through the current uncertainty whilst continuing to invest fully behind [indiscernible].

Thank you very much, and I will now hand back to you Jakob.

Thank you, Richard. So I'll now cover the performance summary starting on slide 18, and we're starting with industrial.

So, in automotive, it was a good first-half. We're down 8% for the year, and 31% for the second-half with a double-digit improvement of in Q4 versus Q3.

We know that I assessed forecasts around the 30% decline in the calendar year 2020 before predicting a 10% increase in global car build in 2021. And we are seeing incremental improvements, but we need to see signs of sustainable volume growth before we can turn more positive given volumes are not yet back to 2018 levels, it's for sure is encouraging to see the growth Q4 and Q3 to see the sustained improvement into the first quarter of this financial year, but we're still mindful of any potential third wave -- second or third waves of COVID potentially hitting our markets.

So we expect quite a bit of volatility in the near-term here on the automotive side. Turning into aerospace, obviously a tough market right now, you know, at the low point, our volumes were down around 50%, the second-half volumes down 49%.

This market remains very subdued. On a more positive note, we work closely with our customers to validate the proposition for PEEK.

And as on mega-programs we asked these two critical questions are they technically viable and is it commercially viable? And I think we're seeing three interactions with our partners and customers that they indeed are.

And in both of our aerospace mega-programs, Brackets and Structures, we've grown revenues this year proving that the proposition for PEEK is still very valid with orders continuing to flow.

On electronics, overall, a much more stable performance with volumes down 6% all impact coming in the third quarter. And in fact by Q4, we were flat compared to the prior year.

We do note the more optimistic forecast for Semicon in 2021, predicting around 6% growth according to WSTS, and with PEEK Interpol to both the CapEx cycle and OpEx we're optimistic on this market in the near-term. During 2020, we have continued to see further innovation.

We launched a new grade of film DBX targeted as speaker built, and it is gaining great traction. DBX enables a more uniform technique, down to three microns.

So, around one quarter of the width of a human hair put in perspective. Where value added resellers interestingly, we did see a single digit growth in the third quarter, but we did see a decline in Q4, although we have started to see this comeback over the last month.

Overall volumes were down 6% for the year, but we would also know that the supply chain going into COVID was relatively dry, the opportunity where demand can return is definitely there. But as I said before, we do need to see another few months of trading first to get a more accurate picture on this end market us with so many of the others we've already covered on the industrial side.

Now, if we move to slide 19, firstly, good news as we delivered over £1 million of revenue from our Loaded Brackets Program, We anticipate further growth this year despite this marketing tough. The slide here shows a great example of the timeline to deliver these programs.

Remember, we developed a hybrid overmolding process six years ago and launched our composite grade AE 250 three years ago. And the final part of the jigsaw saws produced the first pass from a U.S.

facility in 2019 with commercial orders this year and subsequent meaningful revenue. One of the main products up until now have been seat pans with PEEK use to manage weight durability and faster processing.

Remember also, this is a nice area in aerospace. The benefit of thermoplastics is around 25% to 30% faster processing, a greater recycleability, reduce scrap and flexibility in design.

So we anticipate continued progress here and larger parts with significant opportunities for intellectual property protection, not just aligned to Airbus development program, but for other OEMs too. If we move now to a slide 20, I'd want to say a brief word on electric vehicle take-off and landing or eVTOL with the aerospace currently remaining a tough market overall, we do think the opportunity here aligned themselves well to a products and the particular compensates over the next few years.

So we're already working with up to 10 players to commercialize opportunities and to values opportunities here and over the mid-term. If we think about the demand for bespoke past lightweighting structural integrity, and insulative materials, PEEK campuses lend themselves very well to this area.

This could be a huge market over the long-term and importantly content-wise and structural part programs because he put volume for PEEK on eVTOL, different from the levels we see on today's commercial aircraft that range from 100 kilos on a 737 max up to more than 600 kilos, and the Airbus 350 as an example.

Moving to EVs may see one or two applications lost that we gain much more complexity and higher performance requirements across power electronics, thermal management, and electric motors. Our assessment is that up to 100 grams will be the contents on average in an electric vehicle going forward.

And we have been able to validate this through work with a range of OEMs globally. Hybrids are also of interest for us.

And it is worth noting that our gear programs, you should remember are not just transmission gears but gears are now pretty strong and commercialization of these is progressing from next year through 2024. Let me now turn to slide 32, a bit more electric vehicles and turning to performance requirements and some of the areas we're looking at.

Remember, as EV grow to higher voltages with a need for improved efficiency and lower power losses and faster switching and using either silicon carbide or gallium nitride, these are 800 volt batteries versus currently the 400 volt. So there is a need to reliability for motors are turning around 30,000 rounds per minute, around four times of resolutions in a combustion engine.

So, thermal management in motors is incredibly important to remember, PEEK excellent player here. So, no matter whether we have 40,000 feet up in aerospace in the human body, or 10,000 people overall gas applications, there are interesting opportunities and applications for PEEK.

We're great transaction, getting great traction here. And we'll turn to look at the timeline for these opportunities on the next slide.

Slide 23, a brief word on the status of the programs. We have around 10 of them right now globally centered on Asia, including China and in Europe.

Our partners are well established OEMs and tier players. We now see good short to mid-term opportunities as we emerge from COVID and the desire to accelerate the electric vehicle journey continues.

Commercialization to start production will be from late '21 to early '22 with the opportunity to grow in single-digit revenues over the mid-term. We'll move now to slide 24 and a few words on Magma, at Magma we have gained some present revenue from some several smaller projects this year.

The one you can see on the picture is a slide that shows a North Sea jumper line connector pipe deployment for a smaller operator. This was a 6 inch gas production pipe, we've also benefited from a project in the Gulf of Mexico, again a jumper line opportunity.

But as we talked about before, bigger price it in Brazil, the Libra Field run by Petrobras is a significant opportunity. And during the year TechnipFMC hold a stake in Magma as we do stated that PEEK has preferred material of choice for Libra.

The high resistance against CO2, sour gas, deepwater and inability for steel pipe to perform is the opportunity for us. So PEEK has got some initial acceptance, but we do need to develop a TechnipFMC next year a qualification pipe, I suppose the qualification process, and we're working hard on that.

We expect that TechnipFMC and Magma will have greater new flow towards the qualification being finalized in early 2022. On slide 25, we now revert to a medical whilst our revenue was down over 40% at the trough levels as procedures were deferred, we had a good first-half and some sequential improvement in Q4, meeting FY'20 revenues were down 14% on the whole.

The U.S. and Europe were down around 15% for Asia only 8% down as it came out of COVID restrictions much earlier.

We expect U.S. Spine to be on a more gradual recovery than the other geographies, but we're certainly optimistic for this market as a whole going into 2021.

We've got more good news for HA Enhanced, our next generation spine product which delivers better goal on growth, with revenues nearly doubling to £2 million and new approvals both in Europe and in Korea. We shouldn't also forget the growth we have in non-spine application, trauma was up 18% overall, CMS skull plates was up 12% and this is now close to implant business on its own.

They nearly doubled revenues this year before mostly it in Asia. We also saw some double-digit growth in other outside body medical areas like ventilators and drug delivery, tend to have been a challenge as we've talked about and we've adjusted this in our program pipeline, reduced our resources but the clinical evidence remains strong.

So, adoption is really driven by partners. Finally on that, we focus on additional trial sites, including one in India, and we're anticipating another in Europe to build on a program that is already underway in Italy.

Now I will briefly turn onto the medical strategy in slide 26. In the COVID world, medical had obviously become hugely more important.

Just briefly, it is worth remembering the spine in the early 2010s used to be around 80% of our medical business and is now around 60% growth, we've grown our new part of areas in spine like HA Enhanced but in non-spine CMS is growing very quickly now in Asia and in the U.S. We also identified some further opportunities in cardio and drug delivery for PEEK as a good fit.

Remember, PEEK is proven in over 30 million, over 30 million implants globally including good golfers. And then I'm not talking about the exiting President, but I'm talking about Tiger Woods himself.

So yes, whilst our mega-programme and Medical are important, don't overlook the opportunities in non-spine and some of these emerging areas, these are delivering today. So, moving to slide 27 on a bubble chart, firstly continue to look at all programs COVID to be staged.

And the overall conclusion is not the proposition for each of these remain strong even if you may yet see milestone delays, whilst noting that 80% of milestones are delivered in 2020, main movers aerospace brackets moved over £1 million revenue mark, we added E-mobility to my point earlier in the presentation. Aerospace structures our alignment with Airbus and others involved in our projects.

We've also started seeing initial revenue, prototype revenue, which we expect to grow over the coming years, tends to move a back a little bit to reflect higher adoption pathway. And whilst we have moved closer due to the clinical trial, we also have had more interest on top tier players in this market.

The only meaningful revenue or assessments of a pipeline is next financial year FY'22 we have a line of sight to around £10 million in revenue from our Mega-programmes compared to around £3 million today. On slide 28, delivering on our Mega-Programme is all about milestones, I do know that our delivery on these milestone continues to improve, 80% of milestones delivered in FY 2020 as mentioned before, I don't intend to go through the Slide 28 in detail, but it does provide a good flavor and context of what we have to do to accelerate commercialization of these opportunities.

On slide 29 now on our ESG agenda, I'd like to move away from performance now and talk about something that is certainly very close to my heart and to the heart of my colleagues at Victrex. Any other area where we have already a strong competition, we're launching today our enhanced ESG agenda.

If we move on to slide 30, our proposition in the past was built around targets we set seven years ago, focused on three areas of sustainable products, resource efficiency, and responsibility in the community. We've made some great progress, helping save over 2 million tons of CO2 in aerospace through lightweight products and about a similar amount in automotive actually, societal benefits through polymers with 13 million patients now benefiting from PEEK base implants.

Remember also PEEK good recyclability potential, and in fact 0.02% of plastics are in the PEEK family, so good opportunity to develop the circular economy and slowly get recognition for ESG agenda. Pucci Russell defines all sales in being in their green revenue index.

One of 3,000 companies in there, we're well aligned to the mega-trends particularly further help reduce carbon dioxide and carbon footprint. Indeed, our products are really driving changes across industries, whether that be environmental benefits or societal benefits or medical.

On the outlook slide, slide 32, and this is sort of a slide to look at it in relative terms I would say, so when you look at a downside arrow, it doesn't necessarily mean that it's going to be a further reduction from the levels at which it is already at, but it's more relative to our view on the overall segments we serve. So ever so briefly then to wrap it up, we're optimistic or electronic, this market indicating a focus and decrease in top spending in Semicon in 2021, even a smartphone sales are not expected to see a full recovery until 2022, but the work from home trends is February has already seen a 13% increase in durable products according to U.S.

data, obviously many using semiconductors. So we're relatively optimistic about electronics.

Medical, while the recovery may be slower. And then U.S.

is a particular concern given the state of the pandemic these days, we know the growth returning in Asia, industry data shows China med tech support a growth of 23% in calendar Q3 versus the prior year. So they're really catching up and we expect that growth to continue there.

In U.S. orthopedic market iterative revenues are down 70% among med tech, but we are seeing a strong reporting for recent quarterly earnings, suggesting procedure deferrals are coming back.

But as I said before, there are still clouds on the horizon, the rapid rate and rise in infections over quite a period of time now. Overall, we're optimistic about medical.

Although we may see some variable order patterns as we move into the coming quarters. On automotive ISS suggest 83 million cars produced next year versus 73 million this year.

So definitely an opportunity for growth, and I think we're starting to see some of the sprouts off that road, but we may see some uncertain order patterns again particularly in Europe and U.K. with Brexit and clearly, we are anticipating for the waves of COVID in the early part of next year that might have impact as I said on the order patterns in particular.

October and November we're blocking in line with the prior year, but I remember that production is not back to a 2018 levels yet. We stay neutral on automotive.

So we see another few months of trading under our belt, and we'll be able to give you a broader insight here as we speak together in February when we release our Q1 results. On aerospace, well, we are cautious for obvious reasons, volumes remain there is a dude and no real pickup, although we believe the bottom has been reduced, demand in this decade is expected to be 11% lower than 2019 forecast according to Boeing.

But the 20-year outlook is still on the line and we have a number of very nice and very high performance programs that are still able to show growth brackets in the aerospace structures notably, a value proposition PEEK within aerospace remain strong. On energy, again, you know, of course this year, the [indiscernible] forecasted to be flat until autumn at least or 2021, and in fact, we start energy forecast the risk over for the 20% cut to exploration and production investment in 2021.

But like in aerospace, we do have lease opportunities. Magma is obviously progressing as we talked about before, but also our new grades as our pre-organic grades as an example.

And we were also exploring a lot opportunities including PEEK in hydrogen-related application, where PEEK has been used in a number of different areas. So, if we move to slide 33, in summary, firstly, we are seeing incremental demand and a growth month-on-month compared to prior year.

Improvement is across several [technical difficulty] markets. November, okay, back into line with the prior year, although do note that December is always a soft one and difficult to call, but right now it's still in plan.

We also have a particularly strong comparative now with H1 in 2019. We also have the effective undrawn fixed costs as we sell volumes of inventory after Brexit, as Richard mentioned before.

So that with cost actions in place, once demand sustainably improves, we do have the opportunity to deliver improved operating leverage and margin. Our full-year outlook in making progress in 2021 versus 2021 is contingent then on improving end markets in the second-half, as a conclusion.

Longer-term we have a strong ESG agenda with sustainable products, as I mentioned before. Our cash generation is set to improve further with cash inflow once we deliver FY'21 CapEx, supporting growth and dividend returns.

And last but not least, our growth pipeline remains strong. We're progressing towards the milestones there, and we're in fact adding to the pipeline.

So, on the whole, despite the short-term difficulties, I think we're seeing a light at the end of the tunnel, we'll emerge stronger from COVID. And our longer-term value proposition remains strong, and potentially even stronger than it was when we entered into the pandemic era.

Thank you. And we'll now hand it over to Q&A.

Hello, good morning. Thanks for the presentation.

I've got a couple of questions that are hopefully all pretty straightforward. You talked about selling 600 tons out of inventory in fiscal 2020, and yet your inventory balance on the balance sheet is actually slightly positive.

Could you perhaps tell us how much more you've got in inventory, and we can rationalize that? Secondly, the £4 million currency tailwind you booked in the second-half, can we assume that the majority of that was in the medical division, and explains the very strong gross margin in the second-half?

Third, you called a formal inventory revision, also a write-down in fiscal 2020 in your presentation. But as far as I can see there's no mention of that in the press release, and I can't quite workout why.

Is that so routinely you don't feel that it's necessary to fit in, in the release, or is it something that is truly one-off, any color on that, I haven't seen at Victrex before? And then finally, so I know this is a few questions, but could you just elaborate a little bit on your outlook statement.

Are you talking about better economic conditions in the second-half of fiscal '21 relative to the first-half or in the second-half relative to the year before, some context for that would be great? Thank you.

Hi, Alex, thank you for those. So, yes, inventory is pretty much a direct swap between raw materials and finished goods.

So, our finished goods inventory did go down by 600 tons, but we sort of replaced that with raw material inventory. And the reason for that, very simply, this is going into September 2019, for a variety of reasons.

Our inventory of raw materials, particularly those we import from Asia had was abnormally low, we were below safety stock in a number of areas, so we did need to recover in safety stock. So, it's as simple as that switch really.

And then, to be clear, the anticipated reduction this year will be in finished goods. And that will be of the order of 300 tons to 400 tons of reduction during the course of this year.

And I mean your point on currency is, they're actually correct. So, the currency benefits in the second-half rollout disproportionately benefited medical.

I don't have the exact splits in hand for those, but I think your assumption is right. The inventory write-down is sort of an interesting one.

It is intended to be a one-off, and it is precautionary. So, we know the production process that allows us to rework a very substantial part of any surface materials we produce or waste finished goods, so that kind of thing, and which is a good thing about the production process.

If you think that the period we've just been through, we're now in nine months, so and during which our production has been lower than it might have been, partly because of demand, but partly also because of more the need to limit the number of people we have in our production sites and to minimize risk to our employees. And as a consequence we have less people available on site to do activities who might be working inventory.

So those are the main drivers, and therefore we've taken a precautionary inventory write-down in the event that ultimately we're not able to rework all of that material. And I think finally, in terms of our outlook, I think what we're signaling is some sequential improvement.

Jakob talked about our outlook in some various markets. We do remain a little bit cautious in the short-term just because of the potential for customers or the [indiscernible] to be volatile as they sort of manage the period [technical difficulty] coming out of COVID, and we would expect to have a clearer view on that by our [biometrics] [ph] at the start of February.

That's really helpful. Thank you so much.

Hi, thank you for taking my questions. I've got two quick one, please.

Just on the U.K., the de-bottlenecking program, any timing as to when that's delayed and delayed till, and kind of the CapEx related to that? And then the second one is around the bridge that you showed on page 11, on the gross margin development.

We've seen it come down, tracking down over the years, and thoughts on how the polymer departs impacts the gross margin going forward, and where you see that recovery path to in the midterm, that would be really helpful. Thank you.

Yes, so thanks. On the de-bottlenecking at Hillhouse, we have put it on pause, as we said.

The capital investments associated with it was around £15 million, we've talked about that in the past. We have put it into such a state that we can activate it on a relatively short notice.

And from the point in time that we activate it, it would be deployable within 12 months from thereon. So, our strategy here is to monitor the demand situation in the coming quarters.

And then activate it based on the assumption that we see a sharp pickup in demand. And we believe that we would have then adequate time to react to be able to meet that demand with an upgraded facility online.

And to put into perspective, I think it is unlikely that we will start it in this current financial year given the inventory position and the overall outlook in terms of demand recovery. Could it be in 2022?

It could be, but I think this is just something that we will update you as we progress, and we see how sort of demand recovery is panning out in the different sectors across the globe, and as we progress through FY '21. On the margin fees, Richard?

Yes, I mean I think if you look at the bridge, and this was delivery sort of laid out so that if you look at the three main drivers of the decline in the second-half, you can envisage those once the effects of those reverse we're going to get that close to 60%, or just to make the point again, that the timing of that does rely on us needing to recover our production volumes, which may take a while given that unwinding inventory there during this year, but probably not quite to 60%. And the reason for that, as you correctly identify, is the potential over time for a small amount of further investment in preparing our parts businesses, and also as we come to start up the Chinese joint venture, there is inevitably going to be some inefficiency, and uses of materials for commissioning, and that kind of thing.

So, the indicator for that therefore is getting back towards 60%, but probably not quite to 60% at the medium-term.

Thank you, that was helpful.

Thanks. Yes, morning, guys.

Just a quick one for me on the ESG targets, if there was any sort of cost implication, I guess, near to mid-term to be aware of on the -- with achieving the target? Thanks.

Yes, they will be, but they will be relatively small. I think this is factored into everything that we're doing in terms of how we spend CapEx these days, and then provisions are made for that.

So we should expect some incremental CapEx, but nothing that would standout.

That's great, thanks.

Good morning, and thank you for taking my questions. My first one is on the Chinese investment and the joint venture.

I think a lot of analysts would be extending out their forecast to 2023, which would be the first full-year in which this takes affect. What type of tax rate and net income impact would you be expecting on this?

In other words, if the investment is ramped up, could you give an idea of tonnage and the amounts that need to be deducted from minorities for that year or at least the moving parts? My second question is on aerospace brackets and aerospace more generally.

Have aerospace loaded back; it's been qualified on a wider platform? And does -- how do I think about this, in the sense that the sales at the moment are quite small, but usually the way with aerospace is that you qualify on a platform, and then there's full inclusion throughout it, which would imply a higher sales number.

Any update on inclusion of PEEK on A320neo and 737 MAX is also welcome. And finally, a quick question on tariffs.

Under a no-deal scenario, am I right in saying that there is a mid single-digit percentage tariff on PEEK exports from the U.K. to Europe?

Thank you.

Morning, Sebastian. So, some of the -- first those on China, I think the easy one is the tax rate.

So assuming we achieve a kind of technical classification for our business, then we're expecting about 15% in China, so only slightly above the group average. But as to the quantum, I think we would want to come back to that guidance in due course.

The demand is definitely going to be there, but that's going to depend on the speed of ramping up. So, I'm afraid you should probably this space on that one.

Just if I may take the question on tariffs, so mid single-digit is absolutely right. As far as we know [indiscernible] could be 6%.

And then just the point we have made before, which is we think there is a deferment mechanism that we can apply for should tariffs come into affect, [technical difficulty] it could take up to a year to register for that deferment mechanism. But ultimately, we would expect to be able to mitigate the affect if all that works.

Then Martin would you -- yes, address aerospace?

Yes, so, morning, Sebastian. So, on aerospace, you're right, there is this level of qualification.

And once you are qualified on a program you can expect to see a more broad adoption. Where we find ourselves with current loaded brackets program is in a position where we are in the middle of some qualification processes to get the materials certified to be book-ended by the airplane producers.

But also we have some other opportunities where we can get parts specifically approved. And where we find ourselves at the moment is that revenue is coming predominantly from the latter there, where we've got specific parts approved.

Jakob talked earlier about some of the application spaces there, and we continue to see a growing number of those, that those types of application which tend to be around fitments inside the airframe -- inside the aircraft. And actually, as airframe builders are seeing a slowing in orders, what we see airlines doing is actually refitting aircraft, which actually serves some of the things that we've been talking about quite well in terms of their adoption, because they focus on how do they just refit the plane rather than buy a new one.

In terms of your question on the two single aisles more efficient aircraft then I think the use of number around 100 kilos of load then that would be good estimate.

Thanks you. Just to confirm, I believe there were some years in which there were discussions around the April 20 [indiscernible] was difficult to have much visibility on the amount of plane, has that changed in the last 12 months, or have I just missed something?

I think we just -- we are kind of not more sure about they are going to do. So, I think if you use 100 kilos then that's a good number.

Thank you.

Yes, morning everybody. Thanks for taking the question.

It's about the auto area. Just a point maybe a clarification just to check I have got the message right here.

So, on electric vehicles, the 100 grams aspiration stays that was a clear statement, but I think you are saying that you won't really see the material ramp up in revenue until -- from 2020. So, if I have heard that correctly and the question is straightforward, why would you not see that from next year given that we are already at 15% penetration in Europe, for example?

Thank you.

So, I think the development of getting to the 100 grams is a mixture of applications. So, it's not single application.

People are still working on what that platform is and particularly around the machine piece of the architecture. There's a lots of debate, and we aforementioned earlier about this looking at how we perform 800 volts.

And certainly in areas where you are having machines at that level which need to respond to that level of voltage that we are going to see high levels of PEEK adoption. But there is a range of voltages currently been deployed.

And much of what's being deployed at the moment are lower voltage where PEEK has less of play. So that's why are going to see that although there is a level of penetration around a slower built of our numbers in terms of the average grams per car.

And can I just come back on that please Martin, and does that suggest if it's about voltages, is that a comment around the several installation requirements? Or, is it another technical issue?

So, on the voltage, it's clearly about the fact that the electrical performance at temperature and the installation performance that PEEK provide is definitely a competitive advantage over some other materials in that space here, yes. And particularly in electrical brakes and some of the existing materials are beginning to struggle at that voltage.

Okay. Okay, clear.

Thank you very much, Martin.

Thank you, Andrew.

Good morning everybody. Hope you can hear me.

I have two relatively quick questions, and then one more longer term question.

Maggie, sorry, we can't hear you.

Can you hear me now?

Your line is very faint.

You can hear me now?

Yes, that's better, Maggie.

Sorry. And I had two relatively quick questions and then one longer term.

So can you remind us the current installed capacity of PEEK globally, your production capacity? Secondly, if I understand you correctly, you are not expecting any exceptional in FY'20, if you could just confirm that.

And then longer term with transition to the hydrogen economy, there has been lots of questions about how hydrogen is delivered. And one of the potential options is through existing pipelines.

And I have read a decent amount of academic research about the seepage of hydrogen given that the size of the molecule and my research suggest that PEEK film is actually one of the possible or best solutions to line these pipelines in order to deter seepage. Is this something -- I appreciate it's a longer term opportunity, but is this something you as a company are exploring or working with some of these Columbia for instance to explore?

Yes, so firstly on installed capacity, Maggie, so roughly -- the rough picture here is as follows, and now to use common nomenclature speak in the in play capacity which I underline is not necessarily the same as demonstrate capacity or what you are able to get out of a plant at any given point in time. But to talk about installed capacity, I think public records will tell you that we have the largest installed capacity base which is at 7,150 tons of nameplate, probably slightly bigger now with the process improvements that we have been making.

Compared to number two has 2,500 give or take out of a plant in India. That's probably around 1,000 and a plant in U.S.

has probably around 1,500 I guess, and compared to three, you know, less than one, probably has something close to I guess 800 ton for a sole of nameplate.

Okay.

And we might have a couple of Chinese over there getting fewer now that might have something between let's say 500 and 1000 tons of installed capacity. So, if you add all of that up, you are probably ending with an installed base that's somewhere between, let's say, 11 and 12,000 tons of nameplate.

Okay, thank you.

And then, Richard, on the exceptional?

No reason at the moment to believe that will lead to an exceptional share amount.

Okay.

And hydrogen was just close to…

Yes, so interesting question on hydrogen. It's an area that we continue to invest, okay.

PEEK is actually used in a number of applications as a hydrogen barrier. So, we are right to say that in there is a potential place for it there.

We need to look at how would you deploy PEEK into existing pipelines and [indiscernible], while we have done some work in the past looking at how to align pipes with PEEK in installed facilities how to do that, not in the context of hydrogen, but in context of other things. So, there is potential for technological solution.

It's just a question of practicality of deploying it in existing infrastructure. I think there is no doubt that PEEK can play a role in hydrogen handling even if it means new infrastructure needs to be established.

Thank you. That's really helpful.

I appreciate it.

Thanks, Maggie.

Yes, good morning everybody. First one which might be for Martin is in relation to electrical, so it's three-part here, just wanted to check the 100 grams that you talk about for EV, that's incremental.

To extent there is a perception that the gear boxes are much simpler of EVs. In some cases single gear, that raises a question you are having more on the installation and less on the gears.

The second part is one is only NVH play. And in the past, assuming there has been an opportunity because EVs are very quiet and therefore rattling of components is unwanted and there is sort of play for you in terms of the cappings in terms of your high NVH ratings.

And then, just finally sort of point of clarification on the slide 21, you are showing that there is a high value on fully electric vehicles and what you HEVs. I sometimes call them sell-charging hybrids.

But of course, it's something in between which is plug in hybrids. I am assuming you sort of grouped that together with the HEV category and that sort of things scales, HEV lower content, PHEV higher, PEV even higher, will that be a fair read?

I had a couple of others one but may just stick that to start with.

[Indiscernible] that is absolutely right that the drive train complexity associated with electric vehicle it would be much simpler than with an ICE vehicle. And that means that the way that our materials are distributed in an electric vehicle would be different.

Absolutely right, there is a big element of what we see as opportunity in building machine, but also in whole area of bearings and these things have to stop as well, so the braking systems although slight different will still, we believe, implicate PEEK. When we come to the whole area of noise, then you are absolutely right, these vehicles will be very quiet.

They are already quiet, so you hear every noise. So, we do see a position in gears there.

Maybe not in the same way as we're talking with mass balance with the migration [technical difficulty] that we see from a more traditional engine, because the way the drivetrain works is less subject to those challenges. But the principle of the fact that you can use PEEK rather than metal to reduce noise is certainly going to play into actuators and areas like that as well in any vehicle, Adam.

And in terms of the evolution, some of that is about voltage, some of that is about the infrastructure of the car as well. But we do see that when you get to a fully electric vehicle, that's where the opportunity is the biggest for us, yes.

Okay, thanks, Martin. By the way, on the hydrogen play, I also read in academic studies that PEEK can be used in the membranes of high-temperature PEM fuel cells, but it's very much an exotic material.

Maybe the opportunity is bigger in pipe. But a couple of other questions --

I think I would share your view about that, Adam, yes.

Yes. A couple of more simple questions, perhaps, just scoping questions, on medical, you said the revenues were down 40% in May and June.

Forgive me if you gave a sense of this, but would you be able to say where Invibio sales are now relative to pre-COVID levels, just for a sense of what the recovery potential is. And then on aero and energy, of course you don't specifically state the volumes there; they're included in bigger units.

Would you be able to give us a sort of sense of what the aero and energy volumes were as a percentage of either the group or VPS pre-COVID, what the significance of those two areas has been in the past?

So, maybe I'll answer to medical first, Adam. So, on medical then, we saw quite a strange order pattern in -- as we approached the full grip of the COVID crisis, and actually saw some people taking some very defensive positions, making sure that they had good supply security.

So actually we saw quite a fluctuation in order patterns over the height of the COVID pandemic. But we now, we're probably about 20% below I'd say now in answer to your where do we currently sit.

And the main trigger for recovery will be some stability to the confidence in the U.S. around the patient confidence and the confidence that hospitals will have ongoing capacity to be able to deal with elective surgery.

We're seeing the levels in China are back to normal, and we're seeing mixed recovery in Europe. So that's about how countries are dealing with their hospital capacity predominantly.

Yes, that makes sense.

And then just roughly on aero and energy, Adam, sort of aero in 2019 was -- I don't have the previous years in my head, but aero in 2019 was around 6.5%. And energy was probably somewhere close to just around 7%.

And that under fuel energy components, so not manufacturing and engineering piece of it.

Yes, okay, that's helpful.

But I don't unfortunately have the 2019 figures for the September of 2019; I don't have in my head here.

No, that's fine. So, 15-ish or lower percent, yes.

Yes, this is combined. For FY'20 that's ended in September this year, basically.

Yes, okay. Thank you.

Yes, sorry, it's Chetan from JPMorgan. I just wanted to touch base on the inventory write-down just to clarify that is not a reflection of any pricing pressure on the finished goods side, so on the PEEK, it's got to do something with the use of waste and raw materials, not necessarily on the end product itself?

Hi, Chetan. No, and I know this is unusual for us, but this is a precautionary measure associated with mainly the ability to rework materials, as we commented.

For this to relate to any pricing pressure we'd be thinking about net realizable value provisions, we don't have any issues with those. So it's not one of those.

Thank you.

So, thanks, everybody, for joining us this morning. Thanks for your questions, and thanks for your interest.

And we look forward to speaking to you again at the half-year, and hopefully by then face-to-face. So thank you all, and have a great holiday period.