Victrex plc (VCT) Earnings Call Transcript & Summary

[Operator Instructions] I would like to remind everyone that this call is being recorded. I may now hand over to Jakob Sigurdsson to open the call. Please go ahead.

Thank you, Christophe. So good morning, everyone, and welcome to Victrex's Q1 IMS for the first quarter of our FY 2023, which covers the period from October 1, 2022, through 31st of December 2022. So I'm Jakob Sigurdsson; and with me today Ian Melling, our CFO; and Andrew Hanson, our Head of IR. As it is the first quarter and relatively early in the year, we're aiming to keep this call relatively concise one, and I will summarize the performance and Ian will then touch on the financials. And at the end, we'll open it up to Q&A as we always do. In summary, we saw a steady start of the financial year. And remember that our first calendar quarter or first financial quarter, which is the fourth calendar quarter is typically a seasonally weaker quarter for Victrex and has always been so for historical -- from a historical perspective. I think the really good news today is that the average selling prices were ahead of our expectations at around GBP 83 per kilo with very good momentum from price increases and the surcharge pricing mechanism that we implemented as well we told you about in December. This has helped drive revenue up 6% despite an 8% volume decline in the first quarter volumes, and that was a decline slightly greater than we had anticipated. Our selling prices in constant currency were up around 6%. So as we said in December, price increases are coming through nicely with full unutilization effect in 2023. We're really pleased with our revenue performance, but we're mindful of the slower start on the volume side, particularly given the ongoing softness in several markets. I'll now hand it over to Ian for a bit broader summary.

Thank you, Jakob. So in summary, Q1 group revenues of GBP 78.8 million were up 6% versus the prior year at GBP 74.6 million. As Jakob mentioned, we saw very good progress on ASP, which was GBP 83 per kilogram and slightly ahead of expectations, driven by sales mix, price increases, surcharge pricing and currency. It's worth noting that in constant currency, ASP was up 6% compared to the comparative period. Based on current exchange rates, Q1 is likely to be the quarter with the most benefit from currency in 2023. Q1 group sales volumes of 948 tonnes were down 8% on the prior year 1,025 tonnes. I'll cover the end-market performance and drivers behind this now. The biggest driver on our Q1 performance was the reduced activity level across industrial end markets, particularly in Europe, which has been well flagged by our peers. Secondly, as we said in December, we have been seeing some normalization within the value-added resellers area after a period of strong growth. Pleasingly, Aerospace and Automotive grew during the period, which was offset by weakness in Electronics and Energy & Industrial. In Medical, Q1 revenue was strongly ahead of the comparative period which included the impact of COVID-19 variance and lockdowns in Europe, the U.S. and Asia. But overall, Medical is continuing its positive trend, we remain positive on the year ahead for this business. Just touching on the year-to-date. Whilst today's update covers Q1, I would just add a couple of points on year-to-date trading. January remains softer in a number of end markets and volume was lower than January 2022. At a revenue level, year-to-date, January, we remain ahead of the prior year, but sales volume year-to-date is now a low double-digit level decline on the prior year. So our assumptions on full year volumes are reducing and we will update on this at the half year in May when we've had the benefit of seeing trading over the next few months into the spring. So with that, thank you. I'll hand back to Jakob.

So thanks, Ian. Two areas or 3 actually that we want to talk about before we wrap up. So -- and can't forget, in America programs within Magma, we're continuing to support TechnipFMC for qualification and scale up at our new facility in Brazil. And remember that the opportunity for Magma hybrid flexible pipe, this is based on Victrex PEEK and Victrex composite and Victrex pipe extrusion know-how. So we're extremely happy with how the relationship with Technip is progressing. And really proud of being a partner to such a competent organization. We're also expecting the outcome for bids for a key offshore program in Brazil over the coming months. It's an opportunity, particularly the annual volume for us, probably in many hundreds of tons over a multiyear period. In our PEEK Knee program, we have seen further strong progress, patient recruitment to the Maxx Orthopedics clinical trial is medium completion with 33 patients implanted now. 10 patients have already passed the primary endpoint for the clinical trial, which is at the 15-month juncture with no issues or intent required and 2 patients have actually -- or will be passing the [ 2 transplants ] later this month. So really good progress. On Trauma as well, really strong continued progress there with In2Bones on the back order of 510(k) submission and grant last year with now more than 80 patients implanted with the Trauma plates. Turning a little bit again to the outlook. Overall, it's been a steady start with modest revenue growth and pricing ahead of our expectations. We also continue to make good progress in recovering energy and raw material price inflation as reflected in the pricing statistics. And at this early stage, our expectations for the full year are sort of unchanged and we will give you a further update on those in May. So even if we have seen a few -- a soft Q1, in line with what we talked about in December, softer January, February is looking considerably stronger. We're really encouraged by the modest revenue growth, a better sales mix and improved selling prices. However, as I said, we saw softer volumes in Q1 and the market revenue remains a bit uncertain with ongoing weakness in several markets. As Ian noted, we're tracking low double-digit down on volume after January. And -- but I would remind you all that it's early in the year still. I do want to end on a positive note in that we shouldn't lose sight of the horizon here. We know that historically, Victrex has always bounced back sharply after downturns. And when we look at our statistical progression through previous recessions, I think we can conclude that we remain well positioned for when the sprouts of growth start to come through and we see the upturn in the end market. Our outlook in December was based on 2 months of trading and assume flattish full year volumes, and the February is based on 4 months of trading and what we've seen in the first shipping days of February. The macroeconomic environment and sentiment was significantly worse in December. We don't think it can be said that industrial markets or markets in general were in any festive mood in December, but there is a bit of a change of tone in January. Inflation looks to have peaked and the end of interest rate hike seems to be in side for our key markets. I think PPIs for both Europe and U.S. have been moving upwards. Chinese CPI is moving upwards as well according to the latest figures that we printed this morning. Our PPI is slightly behind. Warmer weather in Europe clearly has had an impact on energy prices and better outlook for investors later in the year as well. And a big factor here in the change of 2 probably in the New Year is the easing of the China COVID rules. Petrol improved economic outlook seems to be appearing in data from both IFO in Germany and IMS, obviously. February also looks to be tracking towards being an improvement on January, as I sort of alluded to before. And sort of anecdotally as well from our customer meetings out in Asia, and in Europe in January, it is clear that some sprouts of growth are expected sort of later in the year, and there is a growing sense of optimism even if at an early stage. I haven't seen any sprouts of growth yet. But as I said, [ TMA-wide ] data is starting to look more encouraging and the overall sentiment in the market is turning slightly more optimistic than it was before the end of last calendar year. So full year volumes are expected to be lower than our flattish guidance. Though we are seeing pricing slightly ahead of expectations. And as I said, some more optimism creeping into certain end sectors as we speak. We'll update again in May once we have 3 more months of trading, and then we'll be giving you a bit more color how the year might pan out in its entirety. So thank you all, and I will now open it up to Q&A.

[Operator Instructions] And our first question is coming from Kevin Fogarty from Numis.

Just a couple if I could do, please. Just on pricing, can you give us any sort of granularity on the sort of 6% constant FX increase in pricing? How much of that was -- is just -- is that purely the annualization effect of last year? Or are there kind of additional price increases having been put through in Q1? And just secondly, if I could ask just in terms of end markets, automotive looks to be sort of improved, I guess, or better than when you last reported. Could you just give any comment on where you're seeing the kind of traction there? If you could put a little bit of color on that and just am I kind of reading that correctly in terms of Q1 trends in terms of what you've seen.

Thank you, Kevin. I'll take the pricing question and I'll let Jakob take the one on [indiscernible]. So the 6% constant currency increase includes the actualization of last year's price increases, as you mentioned, but we have continued our price increase program through the first quarter and particularly across contracts that renewed going into the new calendar year. So that will continue through Q2 and into the rest of the year as well. There is a bit of mix in there as well, though, Kevin, so that a lower percentage of VAR sales means that there is a little mix benefit in there as well as the price.

So on the auto side, Kevin, we're up sort of high single digits in volumes for the year, roughly. And our assumption is that this year will be better for the automotive sector than it was last year. I think we're expecting sort of roughly somewhere between 3% and 5% growth versus 2022 in terms of produced cars, that would equate to probably something between 84 million and 85 million cars produced during 2023 according to our forecast and be a little bit sort of skewed according to geographies, obviously, but some growth expected from both China and the U.S. actually. To put this in context, 85 million cars produced or are expected to be produced in 2023 compares with a production volume that was probably close to [ 96 million ] cars, which if I recall correctly, for 2018. So I think there's still some ways to go there in terms of recovery potential, if I face it that way.

The next question is coming from Andrew Stott from UBS.

A couple of things, please. So first of all, going back to Kevin's question on ASPs. How much of that 6% is negotiated versus surcharge? I'm just trying to think about what I need to take away as gas prices go down. That's the first question. The second question is on the TechnipFMC commentary. Can you remind me of when you expect that bid outcome?

Yes. Thank you, Andrew. So I'll go again on price. So in terms of the 6% in Q1, the majority of the like-for-like price increase in that is negotiated price increase, surcharges had a pretty small contribution in Q1. I think in terms of the full year, then our expectations of how much we will recover over the full year from surcharge are clearly reducing as gas prices come down, but it wasn't a huge driver of the Q1 number.

And Andrew, on Technip, then we actually cannot comment on that. That is sort of techniques to comment on it. But I think the expectation is that there might be some neutral off that in the first half of this year, definitely calendar year, that is.

The next question is coming from Charlie Webb from Morgan Stanley.

So a couple for me. So just in terms of the volume dynamic, obviously, coming a little bit weaker than you had expected. Do you think this is a function of the price actions? Are you kind of getting any pushback from your customers? And therefore, is some of this volume loss, could it be market share loss from higher pricing versus perhaps some of your peers and some of the lower market -- lower kind of, I guess, less specialty end of the spectrum? So just trying to hit around that kind of price relationship and mix relationship with what you're seeing on the volume side or is it purely just the end markets? Second to that, just thinking about operational degearing. Obviously, you're talking about double-digit declines in the first part of the year. How do we think about that versus positive pricing, recouping obviously, the inflation effects, the positive mix against that kind of potential degearing effect? Or is it you're just building up inventories? Just trying to understand what that volume loss means as we think about the margin would also be helpful. And then a final question, just following up on the auto point, around -- you expect auto volumes to grow. Is that the right way to think about it? Or should we be more focused on the auto mix, what type of cars we're selling? Clearly, the mix has been extremely favorable in autos for many years now in terms of larger vehicles, high-end vehicles as well. If we were to see a negative mix effect in autos, even regardless of the volume growth, would that be a net positive, neutral or negative kind of outcome for Victrex? Just trying to understand that mix within the equation for autos rather than just the volume number.

Yes. Okay. That's an excellent question, Charlie. So if I start with the price increase question, I think we're not seeing a loss of share here at all. We have been -- how should I put it? Quite respectful in the way in which we've handled those price increases. So I tend to think that volume weakness is probably more reflecting sort of supply chain volatility in a number of places. And clearly, those that are more sensitive to capital investment, cash conservation and I'm particularly thinking here about energy and industrial and value-added resellers as well, which have an exposure to energy, industrial, and they have seen a slowdown towards the end of last year. In the [indiscernible] that was prevalent before the year-end and everybody was really focused on managing working capital and cutting down capital expenditures. So I think the volume softness is more or less sort of driven by those factors and the fact that January was softer than we expected, sort of within the boundaries or around the fluctuation around being at the trough of the demand cycle. And what we're seeing in February would sort of substantiate that February being significantly tracking stronger than January was, as an example. So sum it up. No, I don't think it's a reflection of a market loss at all. It is more of a reflection of what's going on in the industry and sort of random variations in the supply chain as we are navigating a demand trough. And then on the operational gearing effect, I'll hand it over to Ian.

Thanks, Jakob. So thank you, Charlie. As you know, we're not updating our guidance at this point, and we're not talking about profit on the -- with these Q1 numbers. So I'm not going to get drawn too far into this, Charlie, but I think you're right to assume that price is positive in terms of our margins, but the volume effects will be negative, clearly. Those 2, we are weighing up, we did come into the year saying we were going to build a little bit of inventory this year, and that has played out over the first part of the year in terms of what it means for the full year in operational gearing. Well, that will depend more on the volumes in the remainder of the year, which we'll update you more on in May. So more to come in May on gearing and where we are from a margin point of view. But clearly, factors going in, in both directions at the moment.

I think I have one other question to answer. That was on the mix, Charlie. And I think we are expecting a similar kind of mix that we've seen for the past 6 months to carry out with us throughout the year as well. So we are optimistic about the fact that we will see the continued growth trajectory therefore to us to progress through this year.