Victrex plc (VCT) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Victrex Q3 IMS call hosted by Chief Executive Officer, Jakob Sigurdsson; and Chief Financial Officer, Ian Melling. [Operator Instructions] I would like to remind everyone that this call is being recorded. I will now hand over to Jakob Sigurdsson to open the call. Please go ahead.

Yes. Thank you, and good morning, everyone, and welcome to the call for Victrex's Q3 interim management statement. I'm Jakob Sigurdsson, CEO, and I'm joined on the call by Ian Melling, our CFO; and Andrew Hanson, our Head of IR. I will firstly summarize the key points of the announcement, Ian will then cover the numbers and I will then come back and touch on some further progress in our mega-programs, and I explain the latest outlook. We will then open the call to Q&A towards the end. Remember also that today's IMS follows on from a recent trading update 3 weeks ago, where we indicated our expectations for Q3 and revised expectations for the full year. The overall key message today is that the outlook for the year is unchanged from what we communicated in that announcement. And in fact, the Q3 numbers are in line with our guidance at that time. So let's first go to the headlines from Q3. Firstly, volumes are lower on macroeconomic weakness and destocking across several end markets. And as we talked about a few weeks ago, this is driven by Electronics, Energy & Industrial, and Value Added Resellers. Ian will cover those numbers separately in his session. We do continue to see really good progress in Aerospace, which is on track for double-digit growth on a full year basis. Automotive is also stable. And in Medical, we're pleased that we're continuing to see good progress, and this business is well on track for double-digit growth, although we do have a tougher second half comparative in Medical and remember the second half of 2022, so a bounce back in elective surgeries across several regions. So overall, despite a very challenging period, we do remain well positioned for a macroeconomic recovery. And I will now hand it over to Ian. Ian?

Thank you, Jakob, and good morning, everyone. In terms of headline numbers, Q3 group revenue was down 23% to GBP 72.2 million compared to the prior year Q3 of GBP 93.4 million. On volume, Q3 group volume was down 38% to 818 tonnes versus Q3 '22 with 1,323 tonnes. Remember that Q3 last year was a record quarter. On a year-to-date basis, group revenue of GBP 234.4 million is 8% down on the prior year of GBP 253.5 million, with year-to-date group volume of 2,759 tonnes being 23% down on the prior year's 3,586 tonnes. As Jakob has noted, Q3 weakness was driven by Electronics, Energy & Industrial and Value Added Resellers. We continue to see some variability in month-on-month volumes in Q3, and visibility does remain low going into Q4. However, our sales mix remains strong. Pleasingly, Aerospace is going well, and we're continuing to see Medical remaining strong, which will help given its higher margin profile. I'd also like to cover pricing given the good progress we have continued to make on price increases this year. Q3 saw further improvement in average selling prices, taking the year-to-date ASP to GBP 85 per kilogram, supported by price increases, sales mix and currency. For the full year, we now anticipate ASP will be above GBP 84 per kilogram. As a result of improved average selling prices, together with easing energy costs, we are seeing gross margin improvement during the second half compared to the prior year. However, with weaker volumes, gross margin improvement will be slightly held back by lower asset utilization and operating leverage for the rest of the year as a result of the weaker demand. Turning finally to our financial position. We continue to have a highly cash-generative business model, which supports growth investments and shareholder returns. Total cash at the end of June was GBP 27 million, which includes GBP 3.5 million ring-fenced in China. There's no change to the guidance on capital expenditure for this year, and we look forward to seeing CapEx coming down to around 8% to 10% of sales into FY '24 in the midterm. This will support improved cash flows, particularly once we start to see inventory unwind as well. Thank you. And with that, I'll hand back to Jakob.

Thanks, Ian. A brief word on our growth programs, which shows some good progress. A couple of areas to highlight this time around. Firstly, on E-mobility, we now anticipate our new revenues in our E-mobility program will exceed our original expectations, we've seen GBP 5 million in FY 2023, versus the GBP 3 million that we originally guided towards. We're picking up some contracts in this area. And are set to see good growth in E-mobility over the next couple of years. E-Mobility is probably now the most advanced of our mega-programs in terms of revenue. And remember the PEEK is used in various kinds of applications, electrically powered both in the battery area and the motor area, and is again a testament of how PEEK can support very demanding performance requirements. In Trauma, we're making good progress with the PEEK based composite trauma plates, showing a growing demand in U.S. and in Asia. Run rates are now building up towards GBP 1 million revenue this year, with a step-up in plates being delivered through the rest of the calendar year and into 2024. And as we've talked about, we have around five drug development agreements in place right now and showing strong signs of adoption. We have a broader spread of customers now across both U.S. and Asia, and the main demand is being driven by In2Bones, which now is a part of the CONMED Group, where demand for alternative pharmaceuticals has been rapidly increasing. Turning again to our outlook. As I said at the start of the call, the overall outlook is unchanged from what we recently communicated. And as a reminder on that, we guided to a full year adjusted PBT in the range of GBP 80 to 85 million. We also indicated that full year volumes are tracking more than 20% down year-on-year, and that still remains our expectation. Despite the weaker macroeconomic environment, for the remainder of the financial year we're expecting strong ASP, as Ian touched upon, a strong sales mix, easing energy cost. And clearly, our self-help programs will remain supportive. Overall, we continue to be well placed for the time when the macroeconomic environment improves. Looking a little bit beyond FY '23, it's worth noting that we have a strong and diverse core of business even if we're in a cyclical downturn right now. Growing commercialization in our mega-programs, with some very notable milestones achieved. It's also worth remembering that capital investment, which is set to reduce, will support improving cash flows as we enter '24. We are coming off a period where we invested heavily to support our growth opportunities going forward, and this will now be significantly reduced as most of those are in place by now. And last but not least, we have very strong ESG credentials and enable our customers to achieve their ESG related goals. So in summary, our medium- to long-term proposition remains strong, and I will now open it up to the Q&A.

[Operator Instructions] The first question is from Riya Kotecha of Bank of America.

It's Riya on the line. I have a couple of questions, please. Can you talk about demand conditions by end market through June and early July compared to May? Have you had any initial orders come through for post September or discussions with customers that indicate a pickup after the summer? Second, Peek prices and ACA [ pand accounting ] for the third quarter seems to be tracking ahead of your expectations. What proportion of that is structural price increases versus mix from Medical being stronger and VAR being weaker? To what extent do you think customers might prolong the restock if they anticipate Peek prices softening from a high price level? Third, what's driving the upgrade to the EV mega-program revenues compared to the first half figure? Is it pricing tracking ahead of your expectations or volumes being stronger? And can you remind me what the Victrex content in an EV is today compared to the 10 grams that you disclosed in the average car? My last question is, we also saw some M&A in the polyimide space last week that can be used in magnet wire applications and EV batteries. Do you see PEEK and PI as substitute materials in an EV? Or are they used for different purposes, in your view?

So I think that was quite a number of questions there, Riya. So let me see if I can have kept track of all of them. So in the demand outlook, right now in September and beyond, so there is no change in assumptions behind what we said three weeks ago and no specific changes either behind sectors there either. So our forecast for Aero, Auto, Energy, Value Added Resellers, Medical is pretty much unchanged from that point in time. We do not have much visibility beyond September really. But if we look at what we do know, there is sort of, in general, expected to be a continued growth at the same pace and same slope in Aerospace as we've seen year-to-date. The industry is still sort of nudging back to pre-Covid levels. On the Automotive side, there is a growth in production this year. There is forecasted to be growth on this year's number, going into next year. Supply situation there is easing as it relates to availability of chips and other components in the supply chain. Supports growth into next year, but at probably lower rates than this year. On the Electronics side, I think as we look into 2024 -- and remember, this is one of the sectors that has been relatively slow this year. Probably CapEx in semiconductors is probably going to be down probably 20% this year. It's forecasted to grow at an about roughly 10%, I think, on a global basis next year. It varies a little bit by regions, Taiwan and in Korea, actually looking better as we head into next year, which is good for us. I think Korea is expected to grow 17% next year. In Thailand, they'll be about flat, but overall, good growth in semicon and CapEx in semicon next year. Chip demand, I think global semiconductor market is expected to experience a downturn of around 10%. If I recall right, that's expected to sort of turn around next year to between 10% and 12% growth. And on smartphones, as an example, in the Electronics side, I think that's expected to be down around 4% this year and then grow at a similar rate, so reversing in 2024. So we should expect to see some recovery in Electronics broadly. Now moving into Medical, we're expecting to see continued growth there. But as Ian mentioned before, we will also start to face tough comparisons in the second half of this year compared to -- well, from here onwards, actually. So we had a strong and a rising demand in the second half of last year. A tougher comparison this year, but we should still be strong. So [ and then ] seeing growth in Medical. And there's still some COVID catch-ups to be caught up with, particularly in China as they opened up later. And in Energy & Industrials, that's still a bit of a question mark, particularly on the Industrials side. And as we're seeing through VARs, that's a sector that has been particularly hit in recent times by high cost of capital or relatively high cost of capital compared to what we've seen in recent times. On the pricing side, a big part of our pricing increases have been structural as opposed to through surcharges. So we're expecting pricing and other selling prices to be holding out towards the end of the year. Clearly, there is a mix effect in there as well. So as industrial sectors pick up, we will see a reduction in Abbott's selling prices. You mentioned inventory levels in your third question. From what we hear in our customer base, the destocking effect seems to have sort of gone through to a large degree. And I will basically say that the demand on our immediate customers, and therefore the demand towards us, should start to mimic more sort of the demand in the end markets. And that level of demand would be higher. I mean what you've seen in our numbers in the past couple of quarters, where destocking has had a significant extra impact in the bullwhip effect that we're seeing from the demand patterns resulting after COVID has sort of -- has cost. Now you mentioned about E-mobility. We're getting into a number of applications that are associated with battery and motors. And some interesting new opportunities there that have not necessarily been highlighted in the mega-programs, have started to deliver. And clearly, demands for coatings on wire or PEEK coatings on wire is driving a part of that as well. So that's getting us stronger and faster adoption than we anticipated when we guided towards the GBP 3 million mark that we referenced in our earlier material, that we've now upgraded to what's roughly GBP 5 million this year. And in sort of portraying the opportunity, we have indicated that sort of the average PEEK content per car in the ICE world, when we started to use these indicators, was around 8 grams a car. That's now well above 11 grams roughly. So PEEK is used in all kinds of valves, seal rings, bushings and bearings and the like. There was an upside to that by increased penetration of gears, getting to roughly 20 grams a car. And the overall sort of size of the opportunity on average that we have sort of guided towards in the E-mobility world was around 100 grams per car. We're in excess of 100 grams per car on average. Now having said that, the content in a motor these days is -- where PEEK is used is probably somewhere between, let's say, 250 and 300 grams per motor. So you've got to be careful with averages, and I would just underline that. Polyimides, yes. Very good material, but not necessarily a direct replacement for PEEK, but a very good material as well and has a number of interesting applications in high-performance areas. I think these were all of six questions that I noted, but please correct me if I missed out on anything, Riya.

Just to follow up on the last two ones. So what specifically is the Victrex EV content today in terms of grams? Is that with reference to the 250 to 300 grams per motor? Because I guess your application is in the motor wire coatings, so I'm trying to understand what the gram figure is today? And then my last question with regards to polyimide versus polyamide.

No, polyimide is what I was referring to. Maybe my accent sort of betrayed me there. I was referring to polyimides there, with an I, to be clear. And as it relates to our content right now, remember that our opportunities are driven to the move towards 800 volts. And these next generation of batteries are really just taking off right now. So our content in a car right now is relatively low, but as we head more into the new world of higher voltage and higher performance requirements, then that creates a significant opportunity for us. And we're starting to see that in the platforms and the cars that we are specified on. So it's low right now. But to give you an example, I think when we painted the picture of an opportunity of around 100 grams per car way back when, then I think we're seeing that opportunity actually being manifested in the quantities that are used in an electric vehicle right now, both in the motor area and the battery area. And clearly, some of the opportunities that we had in the ICE world are being translated over into electric vehicles as well.

The next question is from Chetan Udeshi of JPM.