Victrex plc (VCT) Earnings Call Transcript & Summary

Hello, and welcome to the Victrex full year results meeting. [Operator Instructions] Just to remind you, this conference call is being recorded. I'll now hand the floor to our host, Jakob Sigurdsson, CEO. Please begin your meeting.

So good morning, everyone, and welcome to Victrex' Full Year Results Presentation for 2020. I'm Jakob Sigurdsson, and I'm joined here today by Richard Armitage, our CFO; and Martin Court, our Chief Commercial Officer. This is our second virtual meeting of the account after the one we had in May at our half year results. We are very sorry that we can't be with you in person, but hopefully, come May and mid-year 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 website 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'll call out the slide number when we're speaking to a specific topic on our slide. So turning to Slide 3 then. The 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 milestones of agility 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 cost generation was positive and operating cash conversion of 101%, enabling us to underpin our growth investments and reinstate business. I'll come back to both of these points. And indeed, behind the headline trading performance, there are either a number of actions we have taken and/or positive developments consistently learned from time when end markets see some sustained improvement, getting closer to whatever will be the new normality. Bear in mind that we have seen a steady incremental improvement in several markets, month-on-month, although overall performance remained subdued. On the whole, I do believe that Victrex has the opportunity to emerge stronger from COVID, and while our long-term value proposition and 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 generations, recording both growth and returns. If we now move over to Slide 4, I want to talk a little bit about how we approach the COVID situation itself before we cover the financials and the headlines. Richard 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 ensuring that the health, safety and well-being of our people were at the highest priority. Firstly, with did set up an essential 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. For our people, we currently have over 70% of our employees home-working with only our U.K. and U.S. manufacturing and our Chinese technical center on-site as normal. It's worth keeping in mind that the U.K. government defined chemicals as an essential industry, and it was defined as life sustaining in several U.S. states. Despite home-working, we have managed to operate very effectively with over 99% on time we did full deliveries in our supply chain for our customers since the offset of COVID-19. We have also supplied multiple customers of COVID-related applications, including ventilator equipment and generated double-digit growth in this area. For our communities, a very impressive response. We had employees volunteering 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 our debottlenecking project at Hillhouse and our interim dividend, and we remain in a healthy cash position. Richard will cover more detail on the financial position shortly. Now we move over to Slide 5. Before we turn to the highlights, as I was saying, it's 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 be easily overlooked given the pandemic. Importantly, we also continued to invest in our business and in our people with growth focus to operating investments up GBP 2 million year-on-year, and this includes our investments in systems and in IT. And I would like to cover these now on Slide 6. The clip shows our 4 company priorities focused around customer experience, accelerating innovation and the commercialization of our pipeline, operational excellence and business excellence. Taking out some examples of how we strengthen our business with COVID, I'll name a few. On innovation, a 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 around mostly our core business. In our mega-programmes, 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 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 roles, mainly in the manufacturing of polymers, but also in our SG&A line, and this will enable us sustain savings and support long-term operating leverage once demand sustainably returns. In ESG and sustainability, we launched our new Vision goals, including a net carbon zero, which I will come out later as further progress and process improvements reduced water and waste. And one example is on one of the processes, which has reduced effluent by 700 tonnes this year. On China, we announced our investment earlier 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. Indeed, noting our last month's performance was around [ 22% ] higher in volumes year-on-year despite the pandemic. Growth is mainly coming from Automotive, Electronics and Medical where we recorded good growth over the last 5 years, well ahead of market growth. Overall, my message here is that we've not sat back and just dealt with COVID, we have used the time well. We've implemented a range of actions of delivered programs, which will support us in the longer term. Now if we move to Slide 7 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 decline of around 40% in Q3 versus the prior year, at 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 note the Aerospace and Energy remained challenging. We're also mindful of a tough first half comparative. Our end markets overall remained subdued, so we need to see how the next months shape up first before we venture into making any positions about the overall progress during FY '21. Richard will cover the financials, but one area that was flagged is the Energy growth in line and consensus expectations with earnings around GBP 75.5 million of profit before tax. This was a decline of 29% versus 2019. This does reflect the high fixed cost base and the drag of margin from under-absorbed overheads, an area that we have been addressing. I will come back and talk about our growth pipeline and the bubble chart later. We continue to make some good progress there. On Aerospace, despite the challenges of the market, we are operating in a niche area with high-performance composite solutions. We did deliver over GBP 1 million of revenue from our new loaded bracket facility on Rhode Island. And remember, this covers bracket, 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 GBP 2 million for HA Enhanced Spine product despite the pandemic. The ability to continue investing is important, and our financial position has helped 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 would now hand it over to Richard for the financial overview. Richard?

Thank you, Jakob. Good morning, everybody. So I'm going to start on Chart 8 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 impact of COVID on our end markets such that sales volume in the second half was down 19% year-on-year to give a decline for the year as a whole of 7% to 3,492 tonnes. This second half impact was most pronounced in Energy, Aerospace and Automotive, together with Medical, which was impacted by widespread delays to elective procedures. Revenue declined by 10% on a reported and constant currency basis to GBP 266 million. This included 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 GBP 142.4 million or by 16% on a constant currency basis, reflecting a decline in gross margin of 650 basis points to 53.5%. Overheads reduced by GBP 4.3 million as we reigned in expenditure as a response to COVID, and exceptional costs comprised a charge of GBP 10 million in relation to our cost reduction program and a further GBP 2 million of acquisition-related expenditure incurred in relation to 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 improvement in a number of our end markets, but we do expect some degree of volatility in our customers' ordering patterns to continue. Bearing in mind that we are a late-cycle business and we were not materially impacted by COVID until June of this year, we note that consensus anticipates that 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 that this consensus view of volumes is reasonable, although we expect to have better visibility in the same Q1 IMS. Reflecting this initial outlook and our resilient financial position, the Board has decided to reinstate dividend payments with a final dividend of 46.14p proposed for the year-end. I'll move on to Chart 9 and looking at the year-on-year movements in PBT in more detail. We see firstly the effect of currency, which was an expected a tailwind of GBP 10 million. We benefited from a year-on-year reduction in overheads of GBP 4 million as discretionary expenditure was curtailed with the onset of COVID. There was also no accrual for our all employee bonus scheme as in FY '19. The decline in volume and weaker mix in the second half had the effect of reducing profit by GBP 26 million. Turning to the recovery of fixed manufacturing costs. We have noticed in the first half that production volumes were approximately 20% down year-on-year and 15% below the associated sales volume as we prepared for our plan of debottlenecking project. As COVID took hold, we were able to reduce our on-site manufacturing personnel to the bare minimum whilst utilizing our high stock levels to ensure [Audio Gap] second half, which was approximately 50% below the prior year to give production volumes for the year as a whole of around 35% below prior year. As a consequence of fixed manufacturing costs were under-recovered by GBP 12 million. We also incurred GBP 4 million of inventory write-offs. Ordinarily, we are able to rework a high proportion of any surplus material through manufacturing. However, with lower production volumes through the year, our ability to do this has been constrained and we have, therefore, taken some additional precautionary inventory provisions. Cost of sales also includes additional manufacturing costs associated with the buildup of production capacity for our Parts businesses, labeled here as growth investment. And we have sustained our R&D expenditure at 6% of revenue. Moving on to pricing margin on Chart 10. Our average selling price was GBP 76.10 a kilo, some 3% down over last year. In the second half, this was 5% below last year. This movement was mainly due to mix. Our Industrial revenue was down 21% in the second half, whilst the Medical was impacted by a sharper decline as effective procedures were deferred with revenue down 32%. Underlying pricing was broadly 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 that the 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%, but 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, our margin has moved between FY '16 and FY '19, which is a period in which gross margin declined from 63% to 60%. In fact, the biggest thing of impact was the presentational effect of adopting IFRS 9 that we reported a year ago. Aside from that, we can see a small decline as we have invested in capacity for our Parts manufacturing businesses in the run-up to commercial production. This investment is critical to the delivery of mega-programmes and to allow us to open up new revenue streams. While this investment will have a short negative impact in the short term, we are confident that these investments will help us to maintain and target return on capital in the medium term. The combination of currency and inflation resulted in a small net increase over that period. Secondly, 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 under-recovery of fixed manufacturing costs of GBP 12 million as I have already noted. The additional inventory provisions accounted for a further decline of 2.7% and will be in the sales mix, 3.1%. These are effects, which should substantially reverse once production volumes recover. The combination of inflation, currency gains and further investment in Parts businesses accounted for a further small decline. Looking forward, we have announced the debottlenecking program will be paused in response to 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 Brexit inventory. The pace at which production volumes return to a more normalized run rate will, therefore, depend on the duration of any coronavirus impact. We do expect some incremental improvement in gross margin this year as a consequence of the cost saving plan that we announced over the summer with approximately half of the GBP 10 million saving relating to cost of sales. Over the medium term, there will be some further investments in operating expense in relation to our Parts businesses and also our Chinese joint venture, but we do expect the negative effects that we have seen on gross margin this year substantially to reverse. So if we move on to the currency on Chart 12. We've again shown the treatment of currency in line with IFRS 9. As before, the individual line items recorded as weighted average stock rate then the gain or loss on forward contracts, which shows as a separate line item within gross profit. The loss on forward contracts showed a GBP 4.4 million improvement versus prior year, which, together with a GBP 5.5 million improvement in the underlying weighted average rate, gave a GBP 10 million tailwind overall, in line with our expectations. This was primarily driven by an effective U.S. dollar exchange rate of $1.27 compared with $1.35 in the prior year. Our expectation for FY '21 is for a headwind of approximately GBP 2 million based on an expected effective U.S. dollar rate of $1.28 and for the time being, an assumption of this movement to the euro. We do note the potential for the Brexit outcome to result in a further weakening of sterling, but we remain highly covered for FY '21. So [ obviously this will be ] opportunity for upside this year. If I cover inventory and also Brexit on Chart 13. First of all, we can see an increase in inventory of GBP 6 million since September 2019. This increase was driven by an increase in raw material and work-in-progress stocks and those were carried out to correct a significant shortfall in safety stocks that we reported a year ago. This has included a substantial increase in the inventory of special rates with significant decline in unit volumes in the first half, which have been planned in advance of our debottlenecking project. Finished goods inventory actually reduced by around 600 tonnes 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'll like to stress the point once more that in addition to providing an important contingency against price disruption, this high level of inventory is serving us well enabling us to maintain strong customer service levels despite having reduced manning of our key manufacturing sites to minimize risk to our employees. Once the Brexit risk is passed, we will bring inventories down fairly swiftly such that we're expecting to see a working capital improvement this year of at least GBP 10 million. Aside from our inventory contingency, we believe that we have prepared as far as possible for the impact at the end of the transition period. REACH registrations are important to us for which we are prepared with new filings 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 tariff applies our exports into Europe, we will also be prepared to seek mitigation of those tariffs while we acknowledge that this could take some time. Moving on to capital investments on Chart 14 and China. I'm pleased to report that our joint venture is progressing as planned. As a reminder, this is a plan to invest GBP 32 million in a new PEEK facility over 3 years in order to support our customers and our growth opportunities in the region. We do, as you might expect, experience some disruption in the early stages of the project, whilst our U.K.-based engineering team was unable to travel to China. However, we have substantially caught up and are on track to for commissioning during 2022. As you can see from the picture, building of civil work is progressing well and we expect that phase to be complete 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. We announced there will be a modest increase in capital spend as we're having to rely more heavily on the local engineering resources during the period of COVID disruption. Looking at capital investment more widely on Chart 15. We have chosen to delay our debottlenecking plant until we see clearer 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 to the position 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 seen 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 GBP 25 million to GBP 30 million this year. Together with our other more received expenditure of the order of GBP 20 million, we're expecting total investment this year in the region of GBP 40 million to GBP 50 million. Finally, on Chart 15, looking at cash. We are 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 at GBP 24.9 million, and we made a further GBP 7.8 million in stage payments in relation to our investments in Parts businesses. Following payment of the final dividend for FY '19 of GBP 39.9 million, our cash outflow for the period was GBP 1.1 million. Moving on to tax. Our outflow increased to GBP 17.2 million compared to GBP 10.9 million in the prior year. This was a consequence of the new HMRC payment arrangements for large companies, which resulted in 6 cash tax payments in the year rather than the previous fall. This will normalize in FY '21. The movement in other financial assets in the prior year are GBP 77.2 million, reflects the unwinding of cash on deposit, which enabled us to pay the 2018 special dividend in FY 2019. Our net cash at the end of the period was GBP 73.1 million. It should be noted that this includes GBP 5.6 million ring-fenced in our China JV, which means GBP 67.5 million available to the large group. We have continued to monitor a number of COVID contingency scenarios that measure the impact on our customers' demand and the timing and shape of a recovery in our end markets. These include consideration of a scenario in which no improvement in trading is seen at all in FY '21. And I'm pleased to report that in no scenario that we envisage running out of cash nor at this point we envisage in needing to utilize our credit facilities. And at no stage in the past 9 months that we utilize any government's emergency borrowing facilities, furlough schemes or other subsidies. We, therefore, continue to believe that we have sufficient capital, borrowing facilities and flexibility to be able to continue to manage through the current uncertainty whilst continuing to invest fully behind our long-term growth. Thank you very much, and I'll now hand back to Jakob.

Thank you, Richard. So I'll now cover the performance summary starting on Slide 18, starting with Industrial. So in Automotive, after a good first half, volumes were down 8% for the year and 31% for the second half with a double-digit improvement over in Q4 versus Q3. We note that IHS forecasts around a 20% decline in the calendar year 2020 before predicting a 10% increase in global car build in 2021. And we are seeing incremental improvement, 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, for sure, is encouraging to see the growth in 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 to Aerospace. Obviously, a tough market right now. At the low point, our volumes were down around 50% with second half volumes down 49%. This market remains very subdued. On a more positive note, we'll work closely with our customers to validate the proposition for PEEK. And as for lower mega-programmes, we asked these 2 critical questions: are they technically viable and is it commercially viable. And I think we're seeing through the interactions with our partners and customers that they indeed are. And in both of our Aerospace mega-programmes, brackets and structures, we've grown revenues this year, proving that the proposition for PEEK is still very valid with orders continuing to flow. In Energy, as tough a market as Aerospace this year, we saw some single-digit growth in the other industrial segments, which, remember, is reported under Energy, but this was offset by oil and gas where second half volumes were down 40% or 25% for the year as a whole. However, again, this market, we have -- in this market, we have seen us grow past the trough, although month -- quarterly volumes are still double-digit down versus the prior year. Innovation-wise, one example is that we gain specification from advanced engineering whilst the company supporting sales for new cryogenic grade of PEEK, demonstrating PEEK's ability to manage extreme temperatures or Magma, I'll come back to that on a separate slide. Don't forget that under other industrial segment, we also report our Manufacturing & Engineering volumes, which were less impacted this year. In the food area, we have started to get some good traction for our food-grade polymer. And we have also secure renowned innovation award in China from Ringier. 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 60% growth according to WSTS. And with PEEK integral 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 indicating great traction. DBX enables a more uniform thickness down to 3 microns, so around 1/4 of the width of a human hair to put it in perspective. On 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 come back over the last month. Overall, volumes were down 6% for the year, but we would also note that supply chain -- the supply chain going into COVID was relatively dry. The opportunity where the demand can be turned 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 as 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 GBP 1 million revenue from our Loaded Brackets program. We anticipate total growth this year despite this market being tough. The slide here shows a great example of the time line to deliver these programs. Remember, we developed a hybrid over-molding process 6 years ago, advanced our composite grade AE250 3 years ago. And the final part of jigsaw saw us produce the first parts 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 used to manage weight durability and faster processing. Remember also, this is a niche area in aerospace. The benefit of thermoplastics is around 25% to 30% faster processing, greater recyclability, reduced scrap and flexibility in design. So we anticipate continued progress here and larger path with significant opportunities for intellectual property protection not just aligned to Airbus development program, but for other OEMs, too. If we move now to Slide 20, I just want to say a brief word on electric vehicle takeoff and landing or eVTOLs. With aerospace currently remaining a tough market overall, we do think the opportunity here align themselves well to our products, and in particular, composites over the next few years. So we're already working with up to 10 players to commercialize opportunities. We see revenue opportunities here over the midterm. If we think about the demand for the structural parts, lightweighting structure integrity and insulating materials in composites lend themselves very well to this area. This could be a huge market over the long term, and importantly, content-wise is structural power programs. We can see good volume of PEEK on eVTOLs not vastly different from the levels we see on today's commercial aircraft, thus bringing some 100 kilos on a 737 MAX up to 1,600 kilos on the Airbus 350 as an example. Now on Slide 21 now, Automotive and electric vehicles, we are introducing a new program to our bubble chart, which is the next generation targeted towards e-mobility. So larger and higher-voltage batteries where the performance requirements are much higher where materials have to sustain 800 watts and beyond. We are often asked are we a beneficiary of electric vehicles and our own assessments indicate we are. With the increasing focus on accelerating EVs, we do see an opportunity to commercialize these programs over the coming years. But firstly, a recap on the journey. If we consider that an average car have -- might have around 8 grams of PEEK today and if you think of a high-end German car that contains PEEK gears, this has around 50 grams. Moving to EVs, may see one or 2 applications lost, but we gain by 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 content on average in an electric vehicle going forward and we have been able to validate this through a work with a range of OEMs globally. Hybrids are also of interest for us. And it is worth noting that our gear programs, which remember, are not just transmission gears but pumps, [ bound ] gears are now trading strong and commercialization of these is progressing from next year through 2024. Let me now turn to Slide 22, a bit more on electric vehicles and turning to the performance requirements and some of the areas we're looking at. Remember, as EVs grow to higher voltages with the need for improved efficiency and lower power losses and faster switching using either silicon carbide or gallium nitride, these are 800-volt batteries versus currently the 400-volt ones. So there is a need to reliability for motors that are turning at around 30,000 rounds per minute, around 4x used in a combustion engine. So thermal management in e-motors is incredibly important. Remember, PCAS, an excellent play here. So no matter whether we are 40,000 feet up in aerospace in the human body or 10,000 feet below in oil and gas applications, there are interacting opportunities and applications for PEEK. We're great transaction -- getting great traction here, and we'll turn to look at the time line 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 of Asia, including China and in Europe. Our partners are well-established OEM and tier players. We now see good short to midterm 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 of growing e-mobility revenues over the midterm. If we move now to Slide 24 and a few words on Magma. At Magma, we have gained some project-based revenues from several smaller projects this year. The one you can see on the picture is a slide that shows a North Sea jumper line, a connector pipe deployment for a smaller operator. This is a 6-inch gas production pipe. We've also benefited from our project in the Gulf of Mexico, again, a jumper line opportunity. But as we talked about before, a bigger prize is in Brazil. The Libra field run by Petrobras is a significant opportunity. And during the year, TechnipFMC, that holds a stake in Magma, as we do, stated that PEEK was the 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 with TechnipFMC next year a qualification pipe that supports the qualification process, and we're working hard at 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 refer to Medical. Whilst 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, meaning FY '20 revenues were down 14% on the whole. The U.S. and Europe were down around 15%, but 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 had more good news for HA Enhanced, our next-generation spine product, which delivers better goal on growth with revenues nearly doubling to GBP 2 million and new accruals both in Europe and in Korea. We shouldn't also forget the growth we have in non-Spine application. Trauma was up 18% overall. CMF skull plates was up 12% and this is now close to a GBP 5 million business on its own at a nearly double revenue this year before, most of it in Asia. We also posted double-digit growth in other outside body medical areas like ventilators and drug delivery. Dental has 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 Knee, we focused on additional trial sites, including one in India, and we're anticipating another in Europe to build on a program that's already underway in Italy. We now, ever so briefly, turn on to the medical strategy in Slide 26. In a COVID world, Medical has obviously become hugely more important. Just briefly, it is worth remembering that Spine in the early 2010s used to be around 80% of our Medical business and is now around 60%. We've grown our new product areas in Spine like HA Enhanced. But in non-Spine, CMF is growing very quickly now in Asia and in the U.S. We've also identified some further opportunities in cardio and in drug delivery, where PEEK is a good fit. Remember PEEK is proven in 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-programmes in medical are important, don't over look the opportunities in non-Spine and some of these emerging areas, Knees, are delivering today. So moving to Slide 37 on our bubble chart. Firstly, we continue to look at all programs that were COVID lensed these days. And the overall conclusion is that the proposition for each of these remains strong even if we may yet see milestone delays, whilst noting that 80% of milestones are delivered in 2020. Main movers are Aerospace Loaded Brackets move over to GBP 1 million revenue mark. We've added e-mobility, to my point earlier in the presentation. Aerospace structures, our alignment with Airbus and others involved in that project. We've also started seeing initial revenues here, prototype revenues, which we expect to grow over the coming years. Dental has moved back a little bit to reflect the higher adoption pathway. And whilst Knee has moved closer due to the clinical trial, we also have had more interest from top-tier players in this market. Beyond meaningful revenue, our assessment of our pipeline is that our next financial year, FY '22, we have a line of sight to around GBP 10 of revenue from a mega-programmes compared to around GBP 3 million today. On Slide 28, delivering on our mega-programme is all about milestones. And you know that our delivery on these milestones continues to improve with 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 in 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 the format now and talk about something that is certainly very close to my heart and to the hearts of my colleagues at Victrex and is an area where we have already a strong proposition. We're launching today our enhanced ESG agenda. And if we move on to Slide 30, our proposition in the past was built around targets we set 7 years ago, focused on 3 areas of sustainable products, our resource efficiency and responsibility in the community. We've made some great progress helping save over 2 million tonnes of CO2 in Aerospace through our lightweight products and about a similar amount in Automotive actually. Societal benefits through our polymers with 13 million patients now benefiting from PEEK-based implants. Remember also that PEEK has good recyclability potential. And in fact, 0.02% of plastics are in the PEEK family. So a good opportunity to develop the circular economy and slow legal recognition for our ESG agenda. FTSE Russell defines all our transport sales as being in their Green Revenue Index, one of 3,000 companies in there. We are well aligned to the megatrends, particularly starting to help reduce carbon dioxide and carbon footprint. Indeed, our products are really driving change across industries, whether that the environmental benefits or societal benefits for Medical. If we turn on to Slide 31 and our ESG vision. We set ourselves some ambitious targets and we've aligned them to the new and sustainable development goals. Pulling out examples, we want to deliver a carbon net zero by 2030, setting CO2 through our own product and production. We're focused on process improvements to help deliver on this in terms of use of our resources. We're focused on growing our sustainable products. Those are environmentally beneficial or beneficial to society, so Transport and Medical. Remember also that we are recognized for our Transport volumes, around 25% or more of the group right now being categorized as green products by the likes of FTSE Russell. And on a circular economy, PEEK can be recycled, but rates are still very low and we'll be working to stimulate and help develop the supply chain here. Alongside these, we'll be focused on strong safety culture and building on our community activity and improving our diversity work wherever we operate. 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 on Electronics. This market is indicating 4% increases in fab spending in semicon in 2021 even if smartphone sales are not expected to see a full recovery until 2022, but the work-from-home trend since February has already seen a 13% increase in durable products, according to U.S. data, obviously, mainly using semiconductors. So we're relatively optimistic about Electronics. Medical, whilst the recovery may be slower and -- then U.S. is a particular concern, given the state of the pandemic these days, we note the growth returning in Asia. Industry data shows China med tech reported 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, revenues are down 7% among med techs, but we have seen 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 even the rapid rate drives 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, IHS suggests 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 of that growth. But we may see some uncertain order patterns again, particularly in Europe and the U.K. amidst Brexit. And clearly, we are anticipating further 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 were broadly in line with the prior year, but remember that production is not back to 2018 levels yet. We stay neutral on Automotive until we see another few months of trading under our belt and then 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're cautious for obvious reasons. Volumes remained very subdued and no real pickup, although we believe the bottom has been reached. Demand in this decade is expected to be 11% lower than 2019 forecast according to Boeing. But the 20-year outlook is still broadly in line, and we have a number of very niche and very high-performance programs that are still able to show growth, brackets and aerospace structures, notably. However, proposition of people in aerospace remains strong. On Energy, again, cautious here. The Baker Hughes rig count is forecasted to be flat until autumn, at least, of 2021. And in fact, we start Energy forecast a risk of up 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 preorganic grades, as an example. We're also exploring other opportunities, including PEEK fit 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 growth month-on-month compared to prior year. Improvement is across several end markets. November came back into line with the prior year, although we note that December is always a soft month and difficult to call. But right now, it's still on plan. We also have a particularly strong comparative now with H1 in 2019. We also have the effect of under-absorbed fixed costs as we sell volumes of inventory after Brexit, as Richard mentioned before. But 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 and making progress in 2021 versus 2021 is continuing 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 I will now hand it over to Q&A.

[Operator Instructions] Our first question comes from the line of Alex Stewart at Barclays.

I've got a couple of questions, but hopefully, all pretty straightforward. You talked about selling 600 tonnes out of inventory in fiscal 2020 and yet your inventory balance on the balance sheet is actually slightly positive. Can you perhaps tell us how much more you've got in inventory and how we can rationalize that? Secondly, the GBP 4 million currency tailwinds 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 out a GBP 4 million inventory revision -- or sorry, 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 work out why. Is that so routine that you don't feel that it's necessary to put in the release? Or is this something that is truly one-off? Any color on it, I haven't been at Victrex before. And then, finally, sorry, I know just 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 for those. So yes, inventory is pretty much a direct swap between raw materials and finished goods. So our finished goods inventory did dip down by 600 tonnes, but we sort of replaced that with raw material inventory and the reasons for that very simply going into September 2019, for a variety of reasons, our inventory of raw materials, particularly though, as we import in Asia, was abnormally low. We were below safety stock in a number of areas. So we did need to recover safety stock. So it's as simple as that switch really, and then just to be clear, the anticipated reduction this year will be in finished goods and that will be of the order of 300 to 400 tonnes of reduction during the course of this year. I think your point on currency is actually correct. So the currency benefit in the second half will have disproportionately benefited Medical. I don't have the exact split at hand, 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 have a production process, but the lands to rework, a very substantial part of any surface materials we produce or waste finished goods or that kind of thing, which is a good thing about the production process. If you think about the period we've just been through, we're now at the end of 9 months, so during which our production has been lower. And it might have been partly because of demand, but partly also because of the need to limit the number of people we have on our production sites to minimize risk to our employees. And as a consequence, we have less people available on-site to do active -- 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 our materials. And I think, finally, in terms of our outlook, I think what we're signaling is some sequential improvement. Jakob's talked about our outlook in some of various markets. We did remain a little bit cautious in the short term just because of the potential for customers' order patterns to be volatile as they sort of manage the period coming out of COVID, and we would expect to have a clearer view on that via IMS at the start of February.

Our next question comes from the line of Mubasher Chaudhry of Citi.

Two quick ones, please. Just on the U.K., the debottlenecking program, any timing as to when that's delayed till and kind of the CapEx related to that? And then the second one is on the bridge that you showed on Page 11 on the gross margin development. We've seen it come down, tracking down over the years. Any thoughts on how the Polymer & Parts impact the gross margin going forward? And where you see that recovery path to -- in the midterm? That would be very helpful.

Yes. I think on the debottlenecking at Hillhouse, we have put on cost, as we said. The capital investment associated with it was around of GBP 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 will 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 will have then adequate time to react to be able to meet that demand. We will then upgrade the 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 piece, Richard?

Yes. I think you look at the bridge, I mean this was deliberately sort of laid down, so that if you look at the 3 main drivers of the decline in the second half, you can envisage that once the effects of those reverse, we're going to get that close to 60%. I will just make the point again that the timing of that does rely on us needing to recovering our production volumes, which may take a while given that they're unwinding inventory during this year. But probably not quite 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 they 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 toward 60%, but probably not quite to 60% at the medium term.

Our next question comes from the line of Henry Carver at Peel Hunt.

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

Yes. There 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 provisions are made for that. So we still expect some incremental CapEx, but nothing that would stand out.

And our next question comes from the line of Sebastian Bray at Berenberg.

My first one is on the Chinese investment in the joint venture. I think a lot of analysts will be extending out their forecast to 2023, which will be the first full year in which this takes effect. What type of tax rate and net income impact would you be expecting on this? In other words, if the investment has ramped up, could you give an idea of tonnage and the amount that needs 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. Do -- have Aerospace Loaded Brackets 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?

So some of the first ones 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 to probably watch this space on that one. Just if I may take the question on tariffs, so mid-single digits, absolutely right. As far as we know, the [indiscernible] WTO tariff could be 6%. And then just the point we have made before, which is we think that there is a deferment mechanism that we can apply for should tariffs come into effect. It could take up to a year to register for that deferment mechanism. But ultimately, we would expect to be able to mitigate the factors if all of that works.

Then Martin, would you address the Aerospace?

Yes. On Aerospace, you're right, there is this level of qualification. And once you're qualified on a program, you can expect to see more broad adoption where we find ourselves at the 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 bookended by the airframe producers, but also we have some other opportunities where we can get parts specifically approved. And where we find us at the moment is that revenue is going 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 types of application, which tend to be around fitments inside the airfreight, inside the aircraft. And actually, as airframe builders are seeing a slowing in orders. What we see airlines doing is actually refixing aircraft, which actually serves some of the things that we've been talking about quite a while 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 2 single-aisle more efficient aircraft, then I think if you use a number around 100 kilos for both, then that would be a good estimate.

Just to confirm, the -- I believe there were some years in which there were discussions around the A320neo at Victrex, but it was difficult to have much visibility on the amount per plane. Has that changed in the last 12 months? Or have I just missed something?

I think we just -- we've become more sure about what they're going to do. So I think if you use 100 kilos, then that's a good number.

And our next question comes from the line of Andrew Stott at UBS.

It's about the Auto area. Just a point of maybe a clarification, just check I've got the message right here. So on electric vehicles, the 100 grams aspiration stays, that was a clear statement. But I think you're saying that you won't really see the material ramp-up in revenue until -- from 2022. So if I heard that correctly and the question is straightforward, why do you not see that from next year, given that we're already at 15% penetration in Europe, for example?

Andrew, I think the development of getting to the 100 grams is a mixture of applications. So it's not a single application. People are still working around what their platform is and particularly around the e-machine piece of the architecture. There's lots of debate. And Jakob mentioned earlier about looking at how we perform at 800 volts. And certainly, in areas where you have these machines at that level, we need to respond to that level of voltage and we're going to see high levels of PEEK adoption. But there's a range of volts that's currently being deployed and much of what's being deployed at the moment at a lower voltage where PEEK has less of a play. So that's why you're going to see that although there's a level of penetration already, a slower build of our members in terms of the average grams per car.

And can I just come back on that, please, Martin. Does that suggest -- is this about voltages? Is that a comment around the thermal installation requirements? Or is it another technical issue?

So on the voltage, it's clearly the fact that the electrical performance, that temperature and the insulation performance that PEEK provides is a competitive advantage over some other materials in that space yet. And particularly around electrical breakdown, some of the existing materials are beginning to struggle at that voltage.

Our next question comes from the line of Maggie Schooley at Stifel.

I had 2 relatively quick questions and then one more longer-term question.

Maggie, sorry, I can't hear you.

Sorry. I had 2 relatively quick questions and then one longer term. So can you remind us the current installed capacity of PEEK globally, so production capacity? Secondly, if I understand you correctly, you're not expecting any exceptionals in FY '20, if you could just confirm that? And then longer term, with the transition to the hydrogen economy, there's been multiple questions about how hydrogen is delivered and one of the potential options is through existing pipelines. And I've read a decent amount of academic research about the seepage of hydrogen given the size of the molecule. And that research suggests 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, then, so the rough picture here is as follows and I'll to use a common nomenclature speak in nameplate capacity. It's -- I underline it's not necessarily the same as demonstrated capacity or what you're 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 tonnes of nameplate, probably slightly bigger now with the process improvements that we have been making. Competitor #2 has 2,500, give or take, out of a plant in India. That's probably around 1,000 and a plant in the U.S. has probably around 1,600, I guess. And competitor 3 Western one probably has something close to, I guess, 800 tonnes or so of nameplate. And then we might have a couple of Chinese, although they're getting fewer now that might have something between, let's say, 500 and 1,000 tonnes of installed capacity. If you add all of that up, you're probably ending with an installed base at somewhere between, let's say, 11,000 and 12,000 tonnes of nameplate. And Richard, on the exceptional?

We have no reason at the moment, I believe, there will be exceptional this year, Maggie.

And Martin, hydrogen, which is close to...

Yes. So interesting question on hydrogen. It's an area that we continue to investigate. PEEK Is actually already used in a number of applications as a hydrogen barrier. So you're absolutely right to say that there's a potential place for it there. We need to look at how would you deploy PEEK into the existing pipelines and quite how that would work. We've done some work in the past looking at how dual-lined pipes with PEEK in-store facilities and how to do that, not in the context of hydrogen, but in the context of other things. So there is potential for a technological solution. It's just a question of perhaps how are they deploying it in existing infrastructure. But I think there's no doubt that PEEK can play a role in hydrogen handholding, even if it means new infrastructure needs to be established.

And our next question comes from the line of Adam Collins at Liberum.

First one, which might be for margin is in relation to electromobility, so a 3-parter. Just wanted to check, the 100 grams that you talk about for EV, that's incremental, to the extent there's a perception that the gearboxes are much simpler on EVs, in some cases, a single gear. So is this a question you're having more on the installation and less on the gears? The second part to this one is, on the NVH play, in the past, assuming there's been an opportunity because EVs are very quiet, and therefore, rattling of components is unwanted and there's a play for you in terms of the cabins in terms of your high NVH ratings. And then just finally, sort of point of clarification on the Slide 21. You're showing that there's a high value on fully electric vehicles and what you call HEVs. I sometimes call them self-charging hybrids. But of course, there's slightly in between, which is plug-in hybrids. I'm assuming you sort of group that together with the HEV category. And the sort of thing scales HEV, lower content; PHEV, higher; PEV, even higher. Would that be a fair read? I had a couple of other ones, we may just stick to that to start with.

Okay. So let's just try to undertake this hunting ground a bit, yes. So that's fully right that the drivetrain complexity associated with an electric vehicle, it will be much simpler than with an ICE vehicle. And that means that the way that our materials are distributed in a electric vehicle will be different. Absolutely right. There's a big element of what we see as opportunity in the e-machine, but also in the whole area of bearings and these things will have to stop as well. So the braking systems are, although slightly different, will still, we believe, implicate PEEK. When we come to the whole area of noise, then you're absolutely right. These bids will be very quiet. So -- or are very quiet. So you hear every noise. So we do see a position in gears there, maybe not in the same words we're talking with mass balance with the vibration and harshness 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. And in terms of the evolution, some of that's about voltage, some of that's 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. And 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 pipes. But a couple of other questions, please.

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 that 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 as 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 clearly 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 group or VPS pre-COVID? What the significance of those 2 areas has been in the past?

Yes. Maybe I'll answer first. 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 in 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 know we're probably about 20% below, I'd say now, and that's where we currently sit. And the main trigger for recovery will be some stability to the confidence in the U.S. around patient confidence and the confidence that hospitals will have ongoing capacity to be able to deal with elective surgery. We're seeing those levels in China are back to normal and we're seeing mixed recovery in Europe, but that's about how countries are dealing with the hospital capacity predominantly.

And then just roughly on the Aero and Energy. And 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 is under a few energy components, so not manufacturing and engineering piece of it.

Yes. Okay. That's helpful [Audio Gap]