Victrex H1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
May 12, 2025

There are 5 speakers on the call.

Operator

Good day, ladies and gentlemen. Welcome to the Viptrex interim results meeting, May twenty twenty five. At this time, all participants are in listen only mode. Later, we will conduct a question and answer session through the phone lines and instructions will follow at that time. I would like to remind all participants this call is being recorded.

Operator

I will now hand over to the CEO of Victrix POC, Jakob Sigurdsson, to open the presentation. Please go ahead.

Speaker 1

Thank you, Garry. Good morning, everyone, and welcome to Victrex's first half year results presentation for 2025. I'm Jakob Sivasan, CEO, and I'm pleased to have with me today, Ian Mehring, our CFO and Andrew Hansen, our Director of IR. This is a virtual meeting, and a copy of our presentation is on our website at www.vixasplc.com under the Investors tab and by clicking on Reports and Presentation. And also briefly in terms of format, we'll be calling out the slide numbers when we are speaking.

Speaker 1

I will start the presentation with our key messages and a summary of the results materials. Ian will then cover the financial detail, and I will then subsequently look at and summarize the business performance and our outlook. And finally, we'll leave some good time for questions and answers. So on Slide four, key messages. I'm going to turn first to Slide four before I do that.

Speaker 1

Just try to have a little brief for those investors who are less familiar with Witrex. That's why I have a good summary of who we are, what we do and the attractions of investing in the company. I'll also call you in cash investment case for Witrex at the end of the presentation. So key messages on Slide four. We had a strong and continued volume momentum in the first half with 16% volume growth, including 14% growth in Q2 year on year.

Speaker 1

This was mainly driven by value added resellers, but also good growth in aerospace, electronics and energy and industrial. I'll come back later with a summary of performance by end market. Secondly, Ian will cover the financial summary, but PPT was flat in constant currency with a sizable headwind in the first half and a mixed impact as well as some initial start up operational challenges in our new plant in China. We're very pleased to have seen a major commercial milestone in our Markman mega program. And this is a very important underpinning to and move closer to a significant growth opportunity for us that we've been working on for quite some time right now.

Speaker 1

Reflecting the headwinds that we have seen in the first half, we do have health and improvement actions, self help and improvement actions in place to drive better outcomes. These include cost factors, but also for the Drista and how we go to market. And this certainly has been helping us in the first half year in sustainable solutions. Finally, on cash, very strong cash conversion at 128%. And Ian will summarize the drivers of that and the performance in the financial area a bit later.

Speaker 1

Now over to Ian for the financial summary. Thank you, Jakob, and good morning, everyone. Before moving to the financial summary, I wanted to reference the table on slide five, where we also summarize the volume and revenue performance by each division and the group level. An important change here is that we now report our Medical division revenues to cover cover both implantable, that's in the body, and non implantable outside the body businesses. Previously, non implantable revenues were reported through sustainable solutions.

Speaker 1

With some new and emerging applications in non implantable, going forward, we will we will report all medical business together under the medical division, which also makes it clearer for investors. It should be noted that the ASP for medical will vary somewhat based on the implantable, non implantable mix and revenue per kilogram is not the best measure of performance in our high value medical segments. Moving now to the income statement on slide six. As we noted, half year volumes were up 16% to twenty eighteen tons driven by sustainable solutions and with good momentum continuing into the second half at this stage. As Jakob mentioned earlier, this was our first two thousand ton half since the second half of twenty twenty two supported by some of our self help actions, in particular, as we started to see some initial go to market improvements in our sales and customer facing teams coming through in terms of winning business.

Speaker 1

Revenue was up 5% at £145,900,000 or 8% in constant currency. Revenue growth is lower than the comparable volume growth, reflecting the sustainable solutions and value added retailers particularly drove the majority of our volume growth in h one. I'll come back to sales next shortly. Currency also weighed on our first half revenues with the corresponding gain from currency hedging of 2,200,000 as shown on the chart. Sustainable solutions revenue was up 6% with medical revenues down 1% and divisional p and l as shown in the appendix on slide 28.

Speaker 1

Moving on to gross profit, which was 4% lower than the prior year at £64,300,000 In constant currency, gross profit grew by 3%. We did see a less favorable sales mix during the year at group level and divisionally, with the key drivers on gross profit also reflecting currency, the benefits of improved asset utilization in our polymer production plants, lower raw material costs and the adverse impact of the ramp up in our China plant, which we have signaled along with some initial and temporary operational challenges. I'll come back to this on a later slide. A brief word on higher asset utilization. We signaled in our announcement that this year we'll see production volumes being more closely aligned to sales volume with an approximately 20% increase in production volumes based on our current plan.

Speaker 1

This drove a 2,600,000 tailwind from better asset utilization in H1. Remember, we are still unwinding inventory this year closer towards £100,000,000 but we are also producing more as sales demand has improved in a number of end markets. Our raw material costs saw some benefits in H1 twenty five as we guided at approximately £2,200,000 We are also focusing hard on procurement savings as one of our key self help actions. Gross margin was down three ninety basis points to 44.1% with approximately two thirds of that or two sixty basis points being directly attributable to annualized China costs and the initial operational challenges in our new manufacturing facility there. We have action plans in place addressing the initial challenges, which should allow us to move to more beneficial production and begin the journey of offsetting this headwind.

Speaker 1

Mix and currency were the other key items impacting gross margin, and I'll summarize those shortly. Turning to overheads. Overheads for the half were up 5% to £40,300,000, up 4% in constant currency, excluding the impact of exceptional items. Excluding wage inflation and accrual for our employee reward schemes, our overheads were broadly flat. We have previously that we are focusing on much more limited increases to operating overheads going forward after a period of investment.

Speaker 1

Interest was an expense of £800,000 in the half, reflecting interest from our China loan being expensed. It was capitalized in the previous h one. Remember, our China manufacturing facility started up in the second half of twenty twenty four, so costs continued to annualize in the first half. Interest is forecast to be approximately £2,000,000 for the full year. Our underlying profit before tax was £23,200,000 down 17% or flat in constant currency.

Speaker 1

Reported PBT was £17,200,000 up sharply as our exceptional items were materially lower at £6,000,000 These comprise the ERP system investments and some business improvement costs related to Project Vista. We did guide to exceptional costs for the full year being in a 5,000,000 to £10,000,000 range and we're not changing this guidance with lower spend expected in HD. Underlying earnings per share of 22.6p was down 16%, in line with the movement in underlying PBT. Reported earnings per share was 17.4p, materially ahead of the prior year, again driven by the lower exceptional expenses. A brief word on our tax rate.

Speaker 1

Our effective rate was 21.2%, some three twenty basis points lower than the prior year, but still above the midterm guidance we've given of 14 to 18%. This is largely driven by the lower proportion of profits being eligible for the pattern box rate when absolute profit is depressed. Turning finally to our dividend. We are pleased to maintain the interim dividend of 13.42p per share. I'll come back to cash flow later and how our cash profile should continue to improve as we move through the next one to two years.

Speaker 1

On slide seven, we show the underlying year on year PBT movement, some of which we have already touched on during my summary of the income statement. Walk walking through the key movements from left to right, sustainable solutions saw £1,800,000 year on year improvement net of price and mix. As we covered earlier, VAR was a key driver of first half growth. Pleasingly, we did see good progress in other end markets, including in aerospace, electronics and energy and industrial. Jakob will cover the end market performance in his summary.

Speaker 1

Medical with a year on year profit decline of £500,000 with the divisional sales combined with spine declining as the effects of destocking and some of the volume based procurement challenges in China continued. Asset utilization was £2,600,000 movement as previously closed together with the raw material benefit of £2,200,000 I'll come on to the initial operational challenges we faced in our China facility, which we are acting on. But the majority of the movement here was the expected annualization of the cost base, which was a year on year impact of £3,700,000. Wage inflation and employee rewards comprised of £2,200,000 negative movement. Currency was the balance of the movement with a £4,600,000 year on year impact in the first half.

Speaker 1

If we move to slide eight, price and margin. Whilst like for like pricing was robust across end markets outside of VARs, mix and FX were the key drivers on our half year average selling price. ASP of £72.3 per kilogram was down 10% and below our guidance of 75 to £80 per kilogram, driven primarily by mix. Mix impact is both between end markets where VAR saw the strongest growth, but also within end markets where the growth came in lower average price applications, for example, in energy and industrial, where the lower priced energy volumes grew faster. It's important to stress that like for like, I.

Speaker 1

E. Same customer and product pricing, formed only a small portion of the overall ASP decline, and this impact was heavily weighted to the more price competitive VAR market. ASP in constant currency was down 7%. A quick word on ASP guidance for FY '25, where we are reflecting the greater contribution from sustainable solutions and ad markets like VAR together with the picture on medical. Consequently, we're now guiding to a range of £72 to £75 per kilogram for AFP in FY '25.

Speaker 1

Coming on to slide nine and the gross margin movements in more detail, with the year on year decline totaling three ninety basis points, but being explained by several key elements. As I signaled already, mix impacts from both sustainable solutions and medical totaled two fifty basis points of gross margin movement in the first half. Better asset utilization added 170 basis points of margin with raw materials adding 120 basis points. China was the largest individual impact on gross margin at two sixty basis points, so around two thirds of the overall year on year decline. Our gross margin excluding China manufacturing, whose sales were immaterial in h one, would have been 46.6%.

Speaker 1

Currency was also a driver of gross margin movement of 170 basis points, reflecting the headwind we saw in H1 and which we will see for the remainder of FY 'twenty five. Looking forward, improved asset utilization will remain positive in FY 'twenty five as we expect to produce more. As signaled earlier, our production plan looks for an approximately 20% increase in volumes year on year with sales volumes remaining strong. Raw material pricing also remains supportive. We are targeting an improved gross margin in the second half helped by these two factors, but also mix improvement from medical as the spine business starts to stabilize and other areas of medical continues to drive growth.

Speaker 1

So gross margin guidance for the full year is now 45% to 47% below our original guidance driven primarily by mix and China manufacturing. A quick word on currency on slide 10. This slide shows the impact of currency hedging as shown on the face of the P and L in line with IFRS nine. Obviously, the offsetting currency impacts on underlying trading are embedded in other lines, most significantly revenue. In the first half, we saw a £4,600,000 headwind at PBT level and we are guiding to an 8,000,000 to £9,000,000 impact on a full year basis.

Speaker 1

This was largely the strengthening of sterling through the prior year, particularly against the dollar, which has continued with current effective rates, including the impact of hedging being at 1.29. We've also seen sterling strengthening at the euro with the latest FY effective rates including hedging impact of 1.16. Currency fee hedge is the dollar and euro, though it's worth noting some unhedged Asian currencies are becoming of greater importance as our growth is factored in those regions. We keep our hedging policies under review in respect of these currencies. Looking forward, it's important to flag that with sterling continuing to strengthen, FY 2025 remains in line with our guidance of approximately £8 to £9,000,000 PBT headwind after hedging with FY '26, a small headwind that current made of approximately 2 to £3,000,000 of PBT.

Speaker 1

About 40% of our hedging is in place for FY '26 at this stage, so that number can change. On slide 11, we cover cash. We're pleased to move beyond the period of heavy investments in capacity and capability. Consequently, with investment now coming down, we do see an opportunity for further improvement in cash flow over the next few years. Looking at the main movements, firstly, operating profit or PBIT of £24,000,000, we saw a higher level of depreciation as our China facilities came online in H2 twenty four and were therefore not in the prior year h one depreciation number.

Speaker 1

Depreciation was £12,600,000 compared to £11,800,000 in h one f y twenty four. Working capital was an inflow of £2,700,000 driven in part by our continuing inventory unwind. Capital expenditure was materially lower at £8,600,000 versus £21,800,000 in the prior year. On a full year basis, we are getting CapEx towards the lower end of our guidance, I. E, around 8% of revenue for CapEx.

Speaker 1

These items drove a strong operating cash flow performance with operating cash flow of £30,700,000 compared to £18,100,000 in the prior year and an underlying operating cash conversion of a 28% versus 64% in the prior year. The net outflow of income tax totaled £3,500,000, similar to last year. Cash exceptional items of £6,900,000 related primarily to our ERP system and project Vistakos. I'll touch on the ERP shortly, but we're pleased to say this was launched and is in place to support enhancements of our business processes as well as increased digitalization. As a result, free cash flow was substantially higher than the prior year at £22,500,000 versus £8,800,000 in the prior year.

Speaker 1

On dividends, we maintained the FY '24 final dividend, representing the £40,100,000 shown on the chart here. Our closing position shows with a lower net debt position versus the prior year h one of £40,700,000, including cash and cash equivalents of £25,400,000. On our RCF, remember we paid back our RCF drawings during the last financial year, so we did draw this facility to a level of £15,000,000 in the first half of this year. Slide 12 covers China. And whilst we're pleased with new manufacturing facilities operational, having come online in the second half of FY 'twenty four, we have experienced some initial and temporary operational and scale up challenges.

Speaker 1

This has affected our products. Remember, our China plans is a portfolio extension with a different grade of peak versus our UK assets, type two peak. But we've quickly implemented an improvement plan and expect to fulfill all customer deliveries during the second half as planned. This will mean lower volumes this financial year, closer to 50 tons compared to the 150 to 200 tons guidance we gave. Consequently, the profit impact will be approximately £2,000,000 higher than the guidance we gave originally.

Speaker 1

It's worth taking a minute to recap on the longer term strategic value of this facility. Firstly, it's a key strategic asset and an important geographic expansion for us in underpinning the growth opportunities across a number of end markets, VAR also and electronics primarily. Secondly, remember some of our VAR customers established facilities in China themselves. We are there to support and share in their growth and there remains significant growth programs to capture in this region. Moving to slide 13.

Speaker 1

One of our key messages in this set of results was the self help and improvement actions we have put in place during what's been a challenging time for all chemical companies. These are not just cost actions, but proactive actions to improve our front end go to market approach with customers. Jacob will cover some of these in his section, but I'd like to briefly cover the key actions. These include a recruitment freeze for all but priority roles, a focus on account management and sales incentives that drive the top line, very tight discretionary spend. Capital spend has come under additional focus whilst ensuring we prioritize safety related investments.

Speaker 1

As I mentioned earlier, this has meant that SG and A costs were broadly flat, excluding wage wage inflation and employee rewards. We continue to expect sorry. We expect to continue this discipline in the second half. I'd like to add a quick word on digitalization. Our Microsoft p three six five ERP system was launched successfully in q two.

Speaker 1

The project is not just a standard ERP system, but includes wider tools such as improved CRM, people management, and asset management. It will, of course, support business processes, but it will also support digital and AI tools to engage and collaborate more effectively with customers through R and D and technical service, and ultimately also provide us with better business intelligence and data. In summary, good start, and we're looking forward to maximizing the efficiency gains from technology over the coming years. To conclude, on slide 14, I'd like to summarize our guidance, which mirrors our outlook statement within our announcement. Firstly, on volumes, whilst there is more uncertainty in the macro environment since the turn of the calendar year, particularly in light of the global trade situation, the strength in volume in the first half and continued momentum into H2 means we're upgrading our volume guidance to high single digits for the year.

Speaker 1

This upgrade moved to mid single digit volume growth previously. We are targeting an improvement in medical during the second half. We know that medical device industry consensus has spoken of a mid year recovery coming in the wider industry, which would equate to our Q4. Remember that non spine did grow in the first half, but we do need to see a broader medical recovery elsewhere. Visibility, however, does remain low in this end market.

Speaker 1

Selling prices I've covered previously, which reflects the medical improvement, supporting an improved sales mix in h two versus the first half to 72 to £75 per kg. Turning to gross margin, we're guiding to 45 to 47%, reflecting the continuing improvements in our UK asset utilization and raw materials easing, offset by the incremental impact of China as I covered on the previous slide. OpEx costs, we kept time control and cost discipline with targeted innovation spend. We will see additional costs from the employer national insurance come through in the second half, and these amounts to around £1,000,000 annually. CapEx and cash flow I've already covered, leading to our summary of a target for substantial growth in the second half underlying PBT compared to the first half.

Speaker 1

Given macroeconomic uncertainties and the headwinds we have covered in our outlook statements, which we expect will ease as we move into the next financial year, we have a range of possible outcomes for profit and are targeting PBT similar to the prior year in the second half. For the full year, this equates to driving some underlying PBT growth in constant currency, remembering that currency is an £8,000,000 to £9,000,000 headwind for the full year. In summary, while we're mindful of the uncertain macro outlook right now, volume momentum remains positive and we'll come back in our Q3 update in early July with a summary of how we are performing versus this guidance. With that, I'll hand back to Jesper. Thank you, Iain.

Speaker 1

On Slide 16, we cover the summary of our volume and revenue performance over the past six quarters, so since the start of FY 'twenty four. As you can see on the chart, run rates have been steadily improving, which is good to see. And we are seeing sustained volume momentum at this early stage in the second half as well. And many of you will know, Witrust does have the usual seasonality in the first quarter, so October through December. But we saw our first half still the same, over 2,000 tonnes, which is something we haven't seen since the end of FY 2022.

Speaker 1

So what's been driving this momentum? Well, firstly, normalization of demand post destocking in several end markets, particularly in electronics, in energy and industrial, and a very strong recovery in VARs. Secondly, we've seen some initial benefits from our product and go to market approach that has allowed us to run our sales force more effectively. That includes how we've been adapting our sales force to the use of new technology, more regional focus in particular as well as stronger key account management. I'll come back to this on a later slide.

Speaker 1

On Slide 17, go to market approach. So we've been working hard on self help initiatives, trying to improve the outcomes as best we can, focused on controlling the things that we can control, mainly through tight management of costs through Cote D'Ivoire, which is focused on improving how we go to a market, improving our sales effectiveness and moving to a regional approach that I referred to before, but also greater deployment of digital solutions with customers, allowing us to showcase the value of PEEK for their requirements. We also target greater effectiveness in our R and D and innovation process. These include much greater use of in silico and digital modelling approaches, We're deciding to open up more opportunities for us and closer collaboration with customers and allowing us to answer them their questions and help them solve their problems faster. Few, if any companies have more data on all the steps from making peak and its precursors through deployment in various complex and conservative demanding applications.

Speaker 1

As a less effective use of digital tools, we're able to leverage this amount of data to the greatest extent. Regionally, we not only have a greater regional focus for our sales team, but we're increasing our penetration in all the geographies as well, either directly or through growing our network of distribution partners. This includes China, South America and The U. S. Finally, on our commercial pipeline, we did see an increase in our mature annualized volume by 26% year on year, and this is based on the pipeline targets for both Medical and Sustainable Solutions.

Speaker 1

On Slide 18, turning to Sustainable Solutions. Good volume progress in the sector, with volumes up 16% and revenues up 6%. Starting with Aerospace, another good performance and we continue to see build rates growing and new applications opening up as well. The formal helping, particularly from Boeing, we saw a 56 increase in deliveries as it relates to planes in Q1 calendar versus Q1 in the prior year. This is around 130 planes delivered in the quarter compared to 83 in last Q1.

Speaker 1

Airbus was slightly lower year on year for the same period, but we're also getting the benefits from the coma business in China. And they are now targeting to build up to 50 planes this year compared to the previous guidance of 40 planes. I think we've reported as well that our content on the C90 line is around 300 kilograms per plane. Our volumes were up 7% in aerospace. I'd also like to mention the growing opportunities in advanced air mobility, a really strong fit for peak based composites.

Speaker 1

Manufacturers are looking for lighter, more durable materials that are recyclable. This was an $11,000,000,000 market in 02/2024 with projections of growth to over 70,000,000,000 over the next ten years or so. So Victor has the winning business here, and we'll update you more on that this year with having some additional contracts in place already in this area. Turning to automotive. Volumes down four percent in the half.

Speaker 1

It is worth noting that we did see some restocking benefits in the prior year, hence making the comparison a bit tougher. Car build for 2025 is now forecast to be 2% up on 2024 by S and P. But clearly, the outlook in auto is tough at the moment, tougher though in the West than it is in the East. We do have a good e mobility business and we note the collaborations in this area, particularly with the 800 where Pete is used to coat the wire. So that was just a fire test.

Speaker 1

Apologies for that. But I was thinking about the 800 volt area where people now use the coaster wire in a very tightly advanced applications rather than using enamels that have been the standard in motors that operate at a lower voltage. Regarding to similar revenue for our immobility programs this year. It's worth noting in this context that the center of gravity for automotive business has been shifting towards Asia in recent times from being around 40% back in 2018 to now being around 60%, half of that in China, a quarter of the automotive business being in Japan and 5% in Korea. So it looks as if we are in tune with the way where auto production is actually moving further east.

Speaker 1

Turning to electronics. Electronics volumes were up 17%. We've seen improvements in semicon as most other companies have. IDC estimated 11% growth in semi for 2025, driven by AI and increasing penetration of chips and devices. So we are mindful of tariff impact on the global environment, particularly in this area.

Speaker 1

Semicon remains around onethree to onetwo of our electronics business. Again, with AI increased memory and PC in use both in the CapEx part and the OpEx part of the Semicon process. If you look at smart devices, remains a good business for us. IDC also estimates the smartphone shipments to grow around 2.5% in 2025, driven by five gs and AI enabled handsets. So this is something supporting peak content in handheld device.

Speaker 1

Remember also peak has a good play in devices, including our active film, with thin film supporting the heat, durability and quality requirements for a range of smart device brands, particularly in small space acoustics. Moving on to Energy and Industrials. Volumes are up 15% at the half year. In contact, rig count was actually down around 10% year on year, but with The U. S.

Speaker 1

Policy changes supporting increased exploration, then there is clearly a growth opportunity here that is coming through our top line. In the industrial space, still a mixed picture here. I think we were looking at PMIs around the world and industrial split here is strongly correlated with that. PMI still being around 50, just about 50 in The U. S.

Speaker 1

And China. So with Eurozone, a bit of a mixed picture, but still in general below 50%, even if there's been a slight improvement post the actions from particularly the German government in the early part of this year. Finally, in value added resellers, volumes are up 30%, but we are mindful that the outlook can change quickly here as well. Remember also that in VARs, this is a relatively small number of companies for processes and compounders who take our peak, excluded into rods and sheets for onboard processing. It's a relatively low touch business for us, limited R and D, but heavy reliability on quality and the security of supply and must appreciate it as such.

Speaker 1

It's interesting to note that over previous cycles, bars have been known sort of as a calorie in the coal mine. In other words, when things head into recession, they have usually left away as they've done out of recessions as well. What we're seeing here is a very strong first half moving to a normalized demand level in the second part of the year and which probably ties to similar kinds of volumes half on half. Slide 19, white space opportunities. We do want to signal some new opportunities we're working on.

Speaker 1

This will generate short and midterm growth. FIFA is a strong team here. This is now becoming a sizable pipeline for Vectrus as concerns around FIFA continue. And companies prepare themselves in several industries for finding alternatives. Applications for us include cookware, cabling and other areas.

Speaker 1

Medical is also an area where we are signaling some new wide space opportunities, partially based on PFAS replacement, but also in other areas. While we've spoken of PEEP in heart pumps, SLOWPLATE and knees and tromophase, emerging opportunities are now being pursued in pharma and non implantable applications as well. Why would peak power value proposition there? Well, it works very effectively in the body. It is durable.

Speaker 1

It is inert. Excellent resistance properties, biocompatibility and slippers properties as well. That, for instance, don't allow us to stick to it. On Slide 20 on medical, I want to provide a reminder on what's really been happening in the past five years or so and putting it the whole movement here in context. So in the years of 2021 to 2023, medical device companies were faced with quite a bit of backlog post COVID.

Speaker 1

The mantra at the time was never to miss a surgery. And during that time, many of them really went from what used to be a just in time kind of inventory policy into just in case because nobody really wanted to miss the procedure. Then that led to quite a bit of stocking in that whole chain, you know, all the way from their tier twos, tier ones, through the industry levels that they themselves were holding and all the way down their distribution chains, which are actually pretty long. In 2023, you know, there was a change of type, 2023 to 2024, where inflationary impact started to kick in and the focus increasingly turned to the balance sheet in these in these companies. And also wanting to try to return to pre COVID margins.

Speaker 1

And the mantra changed. And even if we've seen that from time to time in in previous times that metal device companies do tear down their balance sheet, never have we seen almost all of them do it at the same time. And then that led to the destocking cycle that we have been seeing across the industry up until now. In this current year, obviously, we are monitoring the industry and the demand profiles in a variety of different ways, using a variety of different techniques. And we're seeing some good progress in the first half on non spine applications.

Speaker 1

Non spine half on half this year grew 22% from the levels that we saw in 2024. Spine is yet to recover, but we're seeing early signs of spine recovery in a number of sort of spine that's triple through right now, and that will have a more significant impact as we go through the remainder of the financial year. Just in summary, Medical revenues are stable, 1% down half on half. Non spine now 75% of our business, spine 25%. And as I said, really good growth across non spine.

Speaker 1

And all in all, a stronger and more diverse platform for growth that will have a significant impact on us in the next three to five years where the mix will be changing disproportionately towards medical as a part of our overall revenue base. Moving on to Slide 21, Mark and Mark. This is a composite pipe for the energy industry. Technip's FMC's hybrid flexible pipe is based on our materials and qualification based on the picturesque peak. High retractable pipe is 50% lighter than steel and water.

Speaker 1

High retractable pipe is based on the track, mix of composite tape and our exclusive know how for the pipe that we have licensed to technical agency. The signature of the Etech contract that was announced last week was a key milestone for us. And Technipula has secured a technological order from Petrobras in Brazil. The fundamental value proposition is associated with solving an existing problem, which is stress corrosion cracking in the environment of high sour gas and CO2 content in the reservoirs, helping causing some of these challenges. What does this mean for Victrex?

Speaker 1

Well, firstly, it's a long term opportunity for volume, which will start to pick up from 2026, subject to the final commercial roadmap and milestones agreed between Technip and Petrobras. In volume terms, every an E6 inch pipe offers approximately eight tons of opportunity for peak. With some eight inch pipe expected to be used too, this could be around 12 tons of peak per kilometer, which is obviously a significant upside. We have an exclusive contract to supply Technip. And remember, as Victor speak, the qualifications are based on.

Speaker 1

Clearly, the shape of the ramp up is between Technip and Petrobras, but we initiated some volumes next year and several phases of ramp up thereafter. Just ever so briefly on a topic that is consuming a lot of processing power these days, and that's tariffs. Vectrex has an extension for most of our portfolio from incremental tariffs. If you view the White House example list, you can see the list of product exempt. So limited impact from the direct impact from tariffs other than the existing 6% tariffs for peak from The UK to The U.

Speaker 1

S. As you know on the slide, most of our competitors are either selling from Asia into The U. S. Or dependent on Asia sourced monomers from Asia. So that creates paradoxical picture in terms of the overall benefits for penalties from tariffs.

Speaker 1

But also remember that our own China plant is now is not exporting. It was built with a view of China for China. And also briefly now on the outlook, I think Ian summarized our guidance earlier With, in summary, it seems that we're optimistic for aerospace with a neutral to optimistic view for most of the other markets. Also, we are cautious on given the uncertain macro and tariff impacts and the impact that, that can have on both consumer and corporate confidence, even if the news of this morning are relatively positive in this context. At volume level, we are upgrading the guidance to high single digit growth for the year.

Speaker 1

For profit, we're targeting substantial PBT growth versus half one with H2 on H2 PBT target as being similar, reflecting the uncertain environment. There has been flat on the sales mix, medical and China. This means that for the full year, we do expect to deliver at least some constant currency PPT growth. PPT, remember, that aspect is a headwind of around 8 to 9,000,000 for the full year. Last but not least, the reasons to invest in VITRAX really attractive end market positions.

Speaker 1

We have a good portfolio. We are well aligned to macro drivers in several end sectors, be it aerospace, auto, medical, electronics or energy. Leaders in terms of innovation, and I think we've shown that through the years that we are market makers and we work on creating markets and find new use cases for Peak and we've been successful in that. That means the position creates a sustainable competitive position, sometimes protected by IP, other times protected by know how or a long journey of qualifications that in some sectors are now starting to come to fruition based on some of our mega programs as referenced by what just happened last week on the MatMat program. Committed to self help.

Speaker 1

We do go through cycles as every business does. We have gone through a few more cycles, greater frequency in the last ten years than we probably have seen in the entire history of the company. But the key thing there is the focus of what can you do to control the controllables, use self help to become more efficient, and strengthen your value proposition as well. Strong financial position, very strong cash conversion as we saw in the numbers for the first half. We have made the foundational investments that will serve the business well over the coming years, whether that's in hard assets for production or in human capital to be able to support our customers in the introduction of new products, sector leading return on invested capital, we're coming from the trust that we've seen on the back of investment phase and can view a trajectory towards 20% plus over the longer term.

Speaker 1

And we have been able to offer continued shareholder returns with a robust dividend policy and an expanded capital allocation policy as well. So very strong foundations focused on controlling the controllables over the trough of the cycle, but never losing sight of the horizon in terms of preparing the company for future growth opportunities. With that, I think we'll open it up to to questions from the audience.

Operator

If you've dialed into the call and would like to ask a question, please signal by pressing star one. We'll pause for a moment to assemble the queue. We'll take our first question from the line of Jonathan Chung of Morgan Stanley. Your line is open. Hey.

Operator

Good morning, everyone. I've got two questions, please. So the first one is on your guidance. So you upgraded your volume outlook but reduced your your China volume expectation. So keen to hear your thoughts on which end markets are you seeing better growth outlook in your order book already.

Operator

And my second question is also on your guidance. So, again, you increased your volume outlook, but then you lowered your ASP guidance. So are you expecting to give away some prices to gain volumes in the second half, or is that something you have done in the first half already? Thank you.

Speaker 1

So on the sectors, I think, know, I was obliquely, I think aero will go from strength to strength. So we were expecting good growth in aero in the second half on compared to the first. Also, we're a bit more cautious than we were. We had modest decline in auto. We're still cautious on auto for the remainder of the year.

Speaker 1

We are seeing sort of a normalization of demand sort of in on the valve side as well. Energy and industrial is expected to be very strong, and we're expecting medical implantable to be strong second half as well. So the cost of flex, auto, part of the vast business and medical non implantable, the other sectors should see a good improvement half on half. So roughly on the quality side qualitative side. Sorry.

Speaker 1

You know, it relates to the mix and and ASP. Yeah. Thanks, Jonathan. Appreciate the question. So in terms of our ASP guidance for the full year and what we saw in the first half, what we're really guiding to is a continuation of what we saw in the first half.

Speaker 1

I wouldn't say we're giving away price to bring in business, but there is price pressure out there in the market. If I look at our ASP decline in the first half, it was primarily driven by mix. Mix is over half the ASP decline we saw in the first half. FX was over a quarter, which was just the remaining portion less than a quarter in terms of like for like price. So there is some price pressure out there, but it's far more evident in the VAR space.

Speaker 1

So the more competitive, less differentiated business is where we see where we have seen some price pressure in the first half. We've obviously been successful in terms of keeping and winning business in that space, which is positive for us. It's good profitable business. But there is some price pressure in that space. And really the guidance we've given for the full year just reflects the continuation of what we've seen in the first half.

Speaker 1

No real incremental gains on prices in particular. I think we'll remain pretty robust in terms of like for like price across the business, but, you know, we have seen a mix shift towards the ARs and, You know, the the scale of that in h one means that that just, you know, that that that has to come through to the full year as well, even if we do see a little bit of a little bit of medical recovery and a little bit a little bit of a shift towards other applications away from valves in the second half, helping to just boost that ASP a little bit in the second half versus the first half.

Operator

Okay. Thank you. Can I just add a a clarification question question, please? On your in your opening remarks, you mentioned China volume will be lowered to 50 tons from hundred to 200 tons, but then the impact on profit will be positive 2,000,000 pounds. Could you

Speaker 2

just elaborate on this, please?

Speaker 1

No. Sorry. That's a it's my mistake if it came across that way. So it's a 2,000,000 headwind profit versus our original guidance in terms of the China manufacturing startup challenges that we've had. So that's an additional 2,000,000 headwind.

Speaker 1

The in terms of China, it's important to note, we have had a, strong first half in China as a whole. The headwinds we're talking about relate to our plants in China and the start up and sales of volumes out of that facility, which we're bringing down in terms of our full year guidance.

Operator

Okay. That's clear. Thank you. Your next question comes from the line of Aaron Sikhiri from Berenberg. Your line is open.

Speaker 2

Hello. Good morning. Thanks for taking my questions. I have two, please. The first one is on the ASP again.

Speaker 2

If we exclude for a moment the the mix impact and we look at a different application where you saw stronger volume growth such as bar, electronics and oil and gas. Was the pricing here up in one of these end markets or you're still seeing price decline despite the double digit volume growth? And how should we think about the second half of the year, please? The second question is on China. Perhaps can you explain a little bit or give us more color on real world what has been the issues and how do you think to solve this in the in the near term?

Speaker 2

Thank you.

Speaker 1

Okay. Thank you. Yeah. I'll take the first question in terms of in terms of pricing. Apologies if I repeat something I've already said, but I think it is important we're we're really clear on that.

Speaker 1

In terms of the end markets, I don't think we're seeing huge pricing pressure in terms of prices coming down for the same application that we've been in previously. We did add more volume in lower priced applications in general. So I would point particularly that the energy and industrial space where we added more volume in energy and the oil and gas side, as you mentioned, that is typically at a lower ASP than the overall energy and industrial space. That's not new. That's kind of always been there, but it was a factor in terms of in terms of mix in the first half.

Speaker 1

As I've said already, the one place where we did see some pricing pressure and we did see pricing coming down a little bit that drove a little bit of our ASP decrease less than a quarter was in the bar space where we have seen, you know, a little bit of like for like pricing. And that's really in response to competition in what is a less differentiated space. But in the more differentiated spaces where we've got specs in products, then we have it has been more of a story of maintaining prices during the first half. I don't expect to see a significant change in the second half in terms of like for like pricing. A lot of our business, as we talked about before, is contracted.

Speaker 1

So I wouldn't expect to see significant price swings going from the first half to the second half. Mix is the the piece that can change a little bit. As we've said, we do expect the full year mix to now, given what we've seen in the first half, more weighted towards vast and slightly lower priced applications, but the the the guidance that we've got indicating a small improvement in ASP in the second half is mainly based on slight mix improvements, including slightly higher medical proportion and also a slight shift away from bars in terms of proportion of the total in VSS. And now on on the on the China side, you know, polymerization and the early steps of the process have been going very well. We have been having teething problems with the back end of the process, which is mainly around various steps of refining.

Speaker 1

That has not been consistent with us. But now I think I've got to the root cause of that and and we're getting stable outcomes from that, which then allows us to start to sell on an ongoing basis. We did not want to, obviously, jump start sales before having that back end of the process, you know, fully fully up to our quality standards. Now that we have that, you know, we should start to see a more steady sort of demand buildup from from that plan. So we have some, I would say, keeping issues on the back end of the of the process, particularly associated with the refining step.

Speaker 2

Thank you very much. And can

Speaker 1

I just confirm, is the

Speaker 2

China business going to address just the value added reseller customers? Is that correct?

Speaker 1

You could say the foundation or the base load is really based on value added resellers. But we do see significant opportunities in two other areas. Electronics has always been a large business for us in China. And with everything that is happening around e mobility in China these days, that plant is exceptionally well situated to satisfy some of the demands that we have generated in that area. Interesting to put in perspective that in terms of the share of our volumes in automotive, China has grown from being roughly 10%, eleven % back in 2018 to be around 30% of automotive mix these days.

Speaker 1

And having the plants there able to serve that would put us in an even better position to grow that business over there.

Speaker 2

Thank you. All the best. Thank you.

Operator

Your next question comes from the line of Justin Bideshi from JPMorgan. Your line is open.

Speaker 3

Hi. Thanks. Maybe just coming back to current trends, you know, some of the other chemical industry companies have talked about those sort of a wait and watch approach from customers, pause, you know, smaller order size. Can you can you talk about what you are seeing right now in your volumes and order book? The second question is, I'm sorry if this is a difficult question, but, you know, we've had almost every quarter now for the past year or so, we've seen numbers coming down because of mix.

Speaker 3

I'm just curious at what point does that mix become more something more, you know, structural underlying factor, which, you know, where mix might just be an excuse to some extent? And the last question is, can you talk about how you are thinking about your dividend? Because, you know, last year, you had a payout ratio, which was over a %, and really will be you know, if you keep the dividend for full year unchanged, it will be even higher. At what point do you think, you know, you might have to reflect the earnings pressure you see today in your dividend? Thank you.

Speaker 1

So I think I'm happy to address that, Stefan. And as it relates to the current trends, clearly, everyone has been a little bit apprehensive as of late. In some cases, direct tariff impact and really direct tariff impact is not such a big issue for us. I think everybody in our world and certainly ourselves would be more concerned about the right impact of tariffs, particularly on consumer and corporate confidence, as you wish. Maybe today's news giving comfort to some in that cases, but it's clear that you know, tariffs going on and off with the transitory thing to deal with and navigate.

Speaker 1

And we're very mindful of the uncertainty that comes along with that. And hence, you know, slightly greater amount of caution than it otherwise would have been in our outlook for the remainder of the year. If you look at it sort of sector by sector, we are expecting to see continued growth on the aero side. Aero was in good growth for us in the first half. We're expecting to see that continue.

Speaker 1

Also, we are quite cautious about the second half year even if S and P are forecasting 2% growth. I think we are quite cautious as it relates to our assumption for the second half. Compounders actually have been good for us as has been shaped. So those collectively make up value added resellers. And on the safe side, we're expecting a normalization in demand and maybe not as strong a first half as you saw stronger second half as you saw in the first half.

Speaker 1

The compounders are looking to be strong for the remainder of the year based on specific projects that are in that pipeline. Electronics, we're expecting it to be roughly in line with the first half. Energy and industrial, based on some gains that Ian referred to, we're going to be expecting a good second half there and a growth half on half for sure. And the medical, with the growth that we've seen in non spine applications and recovery in spine, the second half should be quite a bit better than the first. So that gives you a color of the key assumption here.

Speaker 1

Clearly, visibility is is is not great. It never has been really. But there has been this continued moment in in the sectors that I sort of spoke about. And as I said, you know, the key sort of abatement factor right now will be a normalization of demand for shape, which then clearly starts to impact the mix as well. And that sort of, you know, backs up your second question or brings up your second question around, you know, the mix.

Speaker 1

I mean, these these are just the facts. And and, you know, as I've said in my opening remarks, it's highly unusual to see the phenomena that everybody has been observing in the medical device industry. In other words, it seems that the widespread destocking take place over such a long period of time as well. Now that has not happened before, and it clearly has had a long and sustained impact on the mix and the margins. But I do think that we're starting to see the the growth out of that and getting it to a more, you could say, normalized composition of demand that we had into the second half and and into 2026 as well.

Speaker 1

Now on dividends, you know, I'll I'll hand that over to to Ian. And and by the way, you know, those explanations around mix are not excuses to some extent. I mean, these are just the facts. And I think they're explained by phenomena that we certainly have never seen in our entire history. Yes, we have seen medical device companies go into destocking and cleaning up their balance sheet one other time at certain points in time, but never have we seen the industry as a whole doing that.

Speaker 1

And clearly, with the way that the medical business carries with us, you know, it's not a surprise that that has this kind of an impact. And I will also say, you know, you added resellers and EM articulated that very well, it's an important factor for us. It is value generating, but it is the lowest price, and then inevitably, that's the impact of margins. And you know as well, Catherine, well, you can certainly relate to the Henry and the coal mine comments that I mentioned, whereby, you know, we know that they eat the way the way out of recessions, but they also eat away into recessions. So I think we would be expecting to see return to a more normal mix going forward.

Speaker 1

And actually, over a longer period of time, medical will be an even greater part of the mix than it has been in the past. And then that gives you a point for the margin trajectory that we should be expecting, not just over the short term of the cycle but over the longer term as well. On dividend, I'll hand it over to Ian. Thanks, Jacob, and thanks for the question, Justin. Clearly, I acknowledge your your observations on earnings pressure on the dividend.

Speaker 1

The board obviously keeps a close eye on on earnings in terms of our dividend policy. But cash is another informed factor, we had a very strong first half on cash as you've seen. 28% cash conversion more than covers the interim dividend. So the board was comfortable maintaining that interim dividend, and we'll come back to the full year dividend in due course. But I think we do have the expectation now that we can drive strong cash flows with lower CapEx in particular.

Speaker 1

There's still a little bit to go in terms of inventory reduction over the second half of the year. So we are making progress in terms of strong cash flow and that helps to support a dividend in times of of earnings being a little lower. I think it also reflects the board's confidence in terms of growing earnings in the future. So, you know, that's where we are on dividends. We've also got share buybacks in the armory.

Speaker 1

If and when we've got excess cash to return as well, and we're conscious of the attractiveness of those at the current share price. So, yeah, that's where we are on dividend, Jess, and hope that hope that helps. Thank you very much. Thank you very much. Thank you, then.

Operator

Your next question comes from the line of Vanessa Jeffries from Jefferies. Your line is open. From 25 to 35,000,000 target this time last year to 25,000,000 in December and now above 10. Just wondering if you could explain the change a little bit there.

Speaker 1

Sorry, Vanessa. Vanessa, we we we look we didn't hear the first part of your question. Could you just repeat it for us?

Operator

Just on the mega program target going from 25 in December to now above 10.

Speaker 1

I think, you know, in terms of mega program, Talia, it's clear that the from a from a you know, it's a it's a mixed it's a mixed story across the mega programs. We're still very confident of the long term application opportunities here. The number, you know, our the the ramp up of that does does vary and we are, you know, to some extent, hostage to our to our customers on that. You know, we see we see changes in market application and we see movements in the in those development pipeline. So I would say the the biggest impact in the half year has probably been a little bit of slowdown in e mobility overall.

Speaker 1

So e mobility, you know, the rates of adoption in globally on e mobility have come down somewhat in terms of expectations, and we are seeing that impact our e mobility expectations for the full year. Medical, I think, has not seen the growth we were hoping in the first half. We do expect that to recover somewhat in the second half. But I think that's really a kind of a more of a customer issue with our customers and working through some of those issues. It's not a problem with the products or anything to do with our ability to deliver at this point.

Speaker 1

And then May continues to make good progress, but it's pretty early in the early in the story. So I think that that's the overall sense in terms of mega programs. I don't know if you wanna add anything, Hector. No. I think they are all now, you know, gotten to a state of of being significantly more mature than they were a few years ago.

Speaker 1

But Ian is right. We are all dependent on the timelines of our customer base. I do think it is comforting to see that in all of these, our customers or our customers' customers are starting to spend significant amount of money to pull this technology through. And when you're dealing with disruptive technology, you know, that's the sign of the fact that you have solved the technical challenges associated with disruptive idea. You have proven that they do offer a great enough set of economic incentives to be adopted.

Speaker 1

And I think we can see that on all of these five key programs. MAGMA, we saw what happened, which is sort of the ultimate manifestation of this last week in the contract between Petrobras and Technip, where that technology is really unique in terms of its ability to solve real problems on a large scale. And two parties started to spend significant amount of money to pull that technology through and will create a longer sustainable source of revenues for Vectrex and leverage some of the assets that we have been investing you know, over recent years to be able to give confidence in our ability to satisfy the demand needs in in that area. From what Ian mentioned on e mobility, low question that we're incredibly aligned here for long term trends. You know, in 02/1930, I think S and T, I'm quoting the right source, is expecting 15,000,000, one five million cars to be operating on on 800 world platform.

Speaker 1

And on average, 200 grams used to coat the wire in each motor. So that's a 3,000 ton overall opportunity for PEEK. And on aero, when you start seeing all future transactions of Airbus A320 emerged based on your materials technology, your materials being qualified for all the Airbus ecosystem to use that technology to see the uptick with Comac on the 09/19 and then subsequently on the 09/29 and the general trend towards thermoplastic composites very often are mostly based on LNPAK, which is our innovation protected by IP, then that gives you real confidence in the long term value proposition there. And I alluded also to new contracts that we have been signing in the advanced air mobility space, which will sort of further support that. And we see a run rate in aero going from from month to month.

Speaker 1

Quite a bit on back of the mega program. And then on me, you know, we're expecting the first commercial approval for me in the coming weeks in India, and expecting to start the first clinical trial in The US with the first patients to be implanted in the next couple of weeks or so. And just to be clear, Vanessa, we do still see step up in revenue coming this year. It's not you know, we we we we we mentioned the step up towards our target of £25,000,000 in in December, and we do still expect to see a step up in mega program revenue this year on year.

Operator

Okay. So I guess all that being said, would you expect in '26 to reach the 25,000,000 target? And also just on that, I noticed that in your release, you've added this line in your capital allocation policy about m and a focused on technology and mega programs for the first time. Is this something that we should read into that?

Speaker 1

So on the m and a side, I think in the past, know, this tech was very focused on acquiring skills and capabilities to deliver the burden of proof. In all cases, not necessarily to stay in the long term, but more look at it looking at it as a catalytic thing to develop a market, improve peak, good work in in in certain applications. It took different shapes and forms. In Magma, we acquired an efficacy plate and the exit strategy was selling it to a strategic asset indeed happened in due time. And through the equity stake, we were able to catalyze the development of the technology that I think now is and will provide us with a substantial volume growth for the future.

Speaker 1

All of these things were done with the plans of acquiring skills and capabilities, in some cases, with a view of exiting, in other cases, stay in certain applications for the longer term. I think there is an opportunity for us to look at complementary technologies, you know, in high performance material areas, you know, going forward. But again, I should also say that we will be very mindful of the fact of not doing anything that is not accretive to to shareholders in in so doing. But but it is clear that there are opportunities given the know how that we have for what it takes to perform in certain difficult applications, but there is potential opportunities to maybe add to a range of offering in certain areas. Yeah.

Speaker 1

And and just on the on the mega program target, Vanessa, I don't think we're gonna come out with our '26 guidance right now. We'll save that for the end of the year. But there are reasons to be optimistic in terms of the growth of mega programs going into next year, not least driven by the Magma announcement that we saw next week, but last week in a, you know, step up in volume plan.

Operator

Okay. Thank you. More more on sales

Speaker 1

to cover is probably the the the last two months. Mhmm. Yeah.

Operator

Your next question comes from line of Kevin Soggy from Deutsche Numis. Your line is open.

Speaker 3

Hi there. Thanks for taking my questions. Just a couple of questions, please. Just on medical, just to clarify what you're thinking in second half of you. Just, I guess, the the the sort of point on some of that kind of recovery coming through.

Speaker 3

What is it you're seeing currently from customers in what areas it feels like sort of buying might be seeing some sort of recovery there, but I kinda picked up that from the presentation. But just really, what are you seeing in terms of the the degree of confidence, I guess, just in recent weeks would be quite useful there. And if you can add any color in terms of pricing just across that portfolio and the difference there would be quite useful. And then just sort of coming back to the bank number of last week, is it sort of early twenty six when you start to get an idea of how fundamental that could be on the different next week next year? And it has to have a ramp up there.

Speaker 3

And then just finally, if I could ask one of China, is there any sort of cash needs we should now think about? Obviously, a lot of the CapEx haven't been spent. I'm thinking about having to pay investment, etcetera. Is there anything material we should be thinking about there over the next twelve to eighteen months or so?

Speaker 1

Good. Okay. Thanks, Kevin. Let me let me try and make a start. So in terms of medical in the second half of the year, so what so what we saw in the first half was really quite strong growth outside of spine.

Speaker 1

So the the the first half was, if you like, two two two factors. We had spine going backwards, declining in the first half, and and the rest of our medical portfolio growing strongly. So that's across other applications, arthroscopy, CMS, active implantable devices, cardiology, all those areas we saw good growth in in the first half, but spine was going backwards. I think we see those trends somewhat continuing in the second half, but with a with an abatement of the spine decline. So we've got we've got good reasons to think the spine can start to stabilize a little bit.

Speaker 1

Partly, it was a weaker second half of spine last year already. So you've got a slightly easier comp. But also, I think we've got we've got some signs that some of those headwinds in spine, some of that destocking, which I think has been most pronounced in spine, is is starting to come to an end. I'm not I'm not suggesting that clients are gonna bounce back to stellar growth overnight, but I think there are reasons to be optimistic that we can start to, you know, head in the right direction in medical overall going forward, and and that's kind of the basis of our of our fear. So that's the overall picture.

Speaker 1

It's fine. In terms of ASP, I think you asked on on medical as well. So we have a range of ASPs in implantable medical, obviously, non implantable medical as well still. In implantable medical, there are higher ASP applications, which tend to be the lowest volume per procedure. And then you have a lower ASP, typically still significantly higher than our group ASPs, but a slightly lower ASP than the medical and clinical average in the larger volume applications, which is, for example, an example that would be CMS.

Speaker 1

We use a lot more PEEK in one procedure than you do say with a spinal implant or an active implantable. So so that that's the sort of range. There is is there price pressure in medical? There's always a little bit of price pressure, but we're pretty good at holding off, you know, value basing our pricing on value and holding on to that pricing and having those, you know, good, you know, constructive discussions with our customers. I would say the one place we do see a little bit of price pressure in medical and have done over the last year or so, it hasn't helped our number, has been in China spine where the impact of VBP and the reduction of prices to the end in terms of to the, you know, at the hospital from our customers means that there's been more pressure from our customers to reduce price in the China market for spine than there has been typically in medical.

Speaker 1

So we have seen price impacts in in China spine in particular, which isn't isn't helping our our spine growth and our medical growth overall. But hopefully, we're three months of that now and starting to annualize. So hope so that's another reason why spine will be less of a drag in the future. I think those are the first two questions. Yeah.

Speaker 1

The first one on on RadMa and you know what I Go on. Take my RadMa. Okay. So so basically, you know, kind of, you know, the contract that was signed is a technological order, and it's used by Petrobras, you know, and it's a form of a public procurement basically aimed at developing innovative products or services. And it enables the Brazilian government to stimulate innovation, provide initial funding, and then subsequent direct procurement of, you know, the technology or the service.

Speaker 1

So it opens the way for interaction and for commercial sales into Petrobras. And I think it's sufficient to say that it has sort of changed the momentum in the game. After this was finally sealed. I think the challenge on the table right now is how quickly can we get through the final stages of qualification. We feel really, really confident about that.

Speaker 1

There's only a couple of modules left, and they are running with our testing endpoints in October and February, respectively. But already, I think people are anticipating successful outcome of those and are looking for how capacity can be built in Brazil to satisfy the demand that is down there and the problem that needs to be solved. And that what each and every party is is willing to put a stake, particularly between Petrobras and technical guarantee to be ready in position to supply. Right now, there is a capacity constraint in terms of making the pipe itself. Currently, made in Portsmouth, and there's a limited amount of capacity there.

Speaker 1

Ultimately, there need to be assets put in the ground in Accu in Brazil by Technip to satisfy Petrobras' needs. And then that sort of defines the shape of the ramp up curve. But sufficient to say, it will have a very positive impact for us in 2026. But as I said, the maximum capacity down in Portsmouth is probably somewhere between thirty and forty kilometers a year. And for us to grow into the full potential, there needs to be a capital investment in Brazil to pull that through.

Speaker 1

But that sort of could help you bracket the numbers in the near term. And I think the final question was in cash needs in China, just very quickly on that one, Kevin. We don't see material needs for working capital or inventory in China at this point and the CapEx has come right down now. So no significant incremental cash needs in China. We did actually grow inventory in China a little bit in the first half, which was part of the reason why the overall inventory decrease was not as as big as as there has been in previous in the previous year.

Operator

Your next question comes from the line of James Lindquist of Investec. Your line is open.

Speaker 4

Yes. Good morning. Couple for me. Just on the operating efficiency measures that you are implementing at the moment. Can can you give a little bit more color on how they stretch into the medium term and, you know, in terms of available further savings or what OpEx could trend towards over the medium term as a percentage of sales.

Speaker 4

And secondly, on the technical announcement, yeah, apologies if I missed this, but could you just confirm that this means that Petrobras are not committed to using Magma pipes or they're subject to technical performance or are they still also evaluating alternatives to peak? On medical, I'm curious what is the main driver of that strong non spine performance phase? And and you've you've previously indicated Medical as a proportion of overall gross profit would have potentially trend to over the medium term. Would be interested in your in your in your thoughts on that. And then very briefly, finally, you mentioned partnering discussions with top five new players.

Speaker 4

Could could you give me a little bit more color on the on the scope of those discussions, please? Thank you.

Speaker 1

I'll take Mansma and and Lee. So technical announcement, well, this now opens up the opportunity for Petrobras to start spending money on this program and also pave the way for future procurement. There are other technologies obviously available. I mean, current technologies include flexible steel pipes, but we know that they have certain issues. There are other tech programs probably in place also, but I do think that there is a high degree of confidence and certainly a high degree of desire on customer's customers end to pull this through, and that gives a good level of confidence in the size of that opportunity.

Speaker 1

On another five player, I think we can just state that that interest continues to grow for sure. I'm sorry not to be able to be more specific on that, but that will be one of the milestones that we'll be reporting on going forward. But two of the top four, remember that I stood up the top five, it's already signed on two of the top four showing significant interest either either directly or through a collaborating body, if you wish. And I'm sure that on the news of approval in India and the first patient impact in The US, which should happen in the next few weeks, then that will only increase that level of interest. Yes.

Speaker 1

Yeah. And, Jens, I'll try and cover your other questions briefly. So in terms of operating efficiency over the medium term, where are we focused? So it's really across our cost base. We're looking at our efficiency.

Speaker 1

We're looking at how we leverage our digital assets, our new ERP system and other things, other digital assets around that, how we become conserve our customers more efficiently as a result of those. We're also looking at procurement savings as a big part of it. So do I expect to see dramatic reductions in overheads as a result of that? At this point, no. It's really about driving, you know, driving the driving to offset inflation, driving to keep overheads as flat as we possibly can, driving the top line to then pull through the gross profit and leverage on those overheads as we grow the business.

Speaker 1

That's really how we're thinking about it at this point. In terms of what's driving medical in the non spine areas, the answer to that is it's pretty broad based. We have a medical revenue outside of spine and implantable medical revenue outside of the spine is higher in the first half than it was in the first half of our record medical year in FY 'twenty two. That's pretty broad based. I will call out CMS as a bit of a star in that.

Speaker 1

So that's the school place in particular that have made patient specific, and we have seen good growth in that area. But it is broad based. It's across the other areas, cardio, arthroscopy, active implantables as well. So we're seeing strong growth again in the non spine business and with spine declines being tempered that should lead us to be able to drive the overall business. In terms of medium term targets for medical, our target is to grow medical in revenue terms faster than the rest of the business.

Speaker 1

And that, you know, that should form a a bigger portion of gross profits going forward. Obviously, the timing in there, there's other mega programs come online as well. So it it is a bit of a balance. But, yeah, growing medical faster than the rest of the business is absolutely part of the plan. Did that answer your question, Jens?

Speaker 4

Yes. It is. Thank you so much.

Speaker 1

You. Your next question comes from

Operator

line of Christian Bell from UBS. Your line is open.

Speaker 4

Yes. Good morning. Can you hear me okay? Yes,

Speaker 1

Christian. Good morning.

Speaker 4

Good morning. So just a couple of questions for me. The first one, you're expecting similar sales result in the second half twenty five compared to second half twenty four. And what it looks like, sort of similar volume and price, but at the same time, quite a significant significant uplift in gross margins for the second half. So what's the key reason for the uplift and and is it sustainable?

Speaker 1

So, Christine, I think I think we've we've we've guided to a similar a similar a similar profit in the second half to the to the second half of last year. And in terms of what's driving that, you know, we we do have in the second half compared to the first half, you will see higher volumes in the second half compared compared to the first half and that's driven by, if you like, the normal seasonality in the business. A slight improvement in mix as we have slightly stronger medical and a slightly more favorable mix in VSS in the second half, and that's what pulls through the the gross margin assumptions in terms of the second half versus the first half that you see in our guidance. Does that help? Can I clarify that further?

Speaker 4

Yes. So looking at your sort of the midpoint of your full year guidance of 46% gross margin gross margin, it kind of implies a gross margin of roughly around 48 in the second half twenty five, and they they compare it to 44% from the PTC? Yes.

Speaker 1

So I I I think it would be you would be looking at primarily mix. Remember last year as well, the the big drivers the big the big drivers that we have year over year that remain are the efficiency in our manufacturing. So that was a pretty significant benefit in the first half and should be similar a similar benefit year over year in the second half as well as the raw material costs coming through. So those are both margin year over year margin positive continuing to pull through because last year, we made significantly less. So, you know, I think, the 20% increase in production levels this year, and our upgrades in volume just supports that that efficiency in manufacturing.

Speaker 4

Okay. Cool. Thank you. And then the second question was, you said there were some reasons to be optimistic on swine improving in the second half. Are you able just to be a little bit more specific on that?

Speaker 1

I think we've seen we you know, it's based on it's based on what we see with customers in terms of in terms of things starting to stabilize. You know, some of the some of the destocking, some customers who maybe have been buying less have indicated that volumes may increase a little bit in the second half. Again, I'm not guiding to sort of stellar spine growth in the second half, but it's also an easier comp, I think, in the prior year where the spine business was weaker in the second half last year. So it's really based on what we see with our customer base and some of the headwinds we've seen in the first half just starting to abate a little bit.

Speaker 4

Okay. Thank you. There

Operator

are no further questions on the conference line. So I'd like to hand back to the management for closing remarks.

Speaker 1

Well, so thank you for everybody for attending this morning, and we look forward to speak to you again when we come out with our Q3 update in July. Thank you very much.

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Key Takeaways

  • Volume Momentum: 1H 25 volumes rose 16% year-on-year (14% in Q2), driven by VARs, aerospace, electronics and energy/industrial, prompting an upgrade to high single-digit full-year growth.
  • Margin Headwinds: Gross margin fell to 44.1% (–390 bps) largely due to China start-up costs (–260 bps), mix and FX; however, improved asset utilization and easing raw material costs support a new FY 25 margin guide of 45–47%.
  • China Ramp-Up Setback: Operational challenges at the new China plant trimmed expected 2025 volumes from 150–200 t to ~50 t and adds an ~£2 m profit headwind, with corrective actions now underway.
  • Cash Generation: Strong operating cash conversion of 128% delivered £22.5 m free cash flow in H1, with CapEx reduced to ~8% of revenue and ERP deployment reinforcing cost discipline.
  • Mega Program Milestone: Exclusive Technip-Petrobras agreement on the Magma hybrid composite pipe marks a key commercial breakthrough, underpinning significant PEEK demand from 2026 onward.
AI Generated. May Contain Errors.
Earnings Conference Call
Victrex H1 2025
00:00 / 00:00