TIDMVCT
RNS Number : 7326V
Victrex PLC
05 December 2019
5 December 2019
Victrex plc - Preliminary Results 2019
'Full year in-line with expectations; cyclical weakness
offsetting growth markets'
Victrex plc, an innovative world leader in high performance
polymer solutions, today announces its preliminary results for the
12 months ended 30 September 2019.
FY 2019 FY 2018 % change % change
(reported) (constant
currency)(1)
Group sales volume 3,751 tonnes 4,407 tonnes -15% -
---------------- ------------- ------------ --------------
Group revenue GBP294.0m GBP326.0m -10% -11%
---------------- ------------- ------------ --------------
Gross profit GBP176.3m GBP208.0m -15% -14%
---------------- ------------- ------------ --------------
Gross margin 60.0% 63.8% -380 bps n/a
---------------- ------------- ------------ --------------
Underlying profit
before tax (before
exceptional items(1)
) GBP106.2m GBP127.5m -17% -14%
---------------- ------------- ------------ --------------
Profit before
tax (PBT) GBP104.7m GBP127.5m -18% -15%
---------------- ------------- ------------ --------------
EPS 107.2p 128.8p -17% -
---------------- ------------- ------------ --------------
Dividend per share
(regular & special
dividends) 59.56p 142.24p -58% -
---------------- ------------- ------------ --------------
Highlights:
-- Good growth in Aerospace, Energy & Medical offset by Auto & Electronics cyclicality
- FY19 Group sales volumes down 15% impacted by Auto, Electronics & Value Added Resellers
- Run rate stabilising in Q4, with sequential improvement
- Good performance in Medical, revenue +4% with strong growth in Asia
- Underlying PBT down 17%
-- Further progress to commercialise 'mega-programme' pipeline
- First commercial order for Aerospace composite parts, new US facility operational
- New Aerospace Structures mega-programme (long-term development alliance with Airbus)
- >10 development programmes for PEEK Gears
- Double-digit revenue growth in next generation PEEK-OPTIMA(TM) HA Enhanced Spine product
- PEEK Knee clinical trial underway
-- Cash generation impacted by Brexit & debottlenecking inventory build
- Operating cash conversion(1) of 87%, impacted by stock build; available cash(1) of GBP72.8m
- Final dividend held at 46.14p/share
- Investments to support 3D printing and moulding technology
- Two-year GBP15m debottlenecking investment underway, unlocking incremental capacity
Jakob Sigurdsson, Chief Executive of Victrex, said: "Our full
year performance was in line with expectations, with good growth in
Aerospace, Energy and Medical being offset by a deterioration
during the second half in Automotive, Electronics and Value Added
Resellers (VAR), although these end markets are gradually
stabilising.
"Pleasingly, we saw further progress in our new product pipeline
and mega-programmes. We secured our first commercial order for
Aerospace composite parts, we signed a new long-term development
alliance with Airbus to support larger Primary and Secondary
structures, and we saw strong growth in our next generation
PEEK-OPTIMA(TM) HA Enhanced product for the Spine market. In PEEK
Gears, our value proposition is strong and we have multiple
development programmes underway, as well as gears on the road.
"Looking forward, Automotive and Electronics are showing signs
of stability, although we will retain some caution on these markets
at this early stage, with an initial assumption that current trends
will continue through the first half year. Our cost-effective
debottlenecking project is underway, enabling Victrex to gain
significant incremental capacity in support of our medium-term
growth programmes, although an extended shutdown will mean some
under recovered overheads. On a full year basis, currency offers a
modest tailwind although this will be offset to a large degree by
some limited incremental operating investment, cost inflation and
our employee bonus scheme. Overall, we remain focused on making
year-on-year progress and our Polymer & Parts strategy keeps us
well placed to deliver our medium to long term growth
opportunities."
(1) Alternative performance measures are defined on page 12.
About Victrex:
Victrex is an innovative world leader in high performance
polymer solutions, focused on the strategic markets of automotive,
aerospace, energy (including manufacturing & engineering),
electronics and medical. Every day, millions of people use products
and applications which contain our materials - from smartphones,
aeroplanes and cars to oil and gas operations and medical devices.
With over 40 years' experience, we develop world leading solutions
in PEEK and PAEK based polymers, semi-finished and finished parts
which shape future performance for our customers and our markets,
and drive value for our shareholders. Find out more at
www.victrexplc.com or follow us on LinkedIn and Twitter
@victrexir
A presentation for investors and analysts will be held at 9.30am
(GMT) this morning at JP Morgan, 1 John Carpenter Street, London
EC4Y 0JP. A conference call facility will be available for analysts
and investors who are unable to attend the presentation. To
register, dial +44 (0) 3333 000804 and participant pin 12149504#.
The presentation will be available to download from 9.00am (GMT)
today on Victrex's website at www.victrexplc.com.
Enquiries:
Victrex plc:
Andrew Hanson, Director of Investor Relations & Corporate
Communications
+44 (0) 7809 595831
Richard Armitage, Group Finance Director
+44 (0) 1253 897700
Jakob Sigurdsson, Chief Executive
+44 (0) 1253 897700
Preliminary results statement for the 12 months ended 30
September 2019
'Full year in-line with expectations; cyclical weakness
offsetting growth markets'
Group financial results
FY sales volume down 15%, stabilising in Q4
Group sales volume of 3,751 tonnes was 15% down on the prior
year (FY 2018: 4,407 tonnes), principally reflecting the
cyclicality in Automotive and the associated impact on our Value
Added Resellers segment, together with some de-stocking, with
supply chain inventories running very low. We also saw an impact
from the weaker Electronics market, with both Semiconductor and
smartphone markets down, as well as a tough year on year
comparative for the large Consumer Electronics contract, with
negligible volumes in FY 2019. Excluding the effect of the large
Consumer Electronics contract, sales volume was down 12%, with
revenue down 8%.
Q4 sales volume of 940 tonnes was 5% lower than the comparative
period (Q4 2018: 990 tonnes) but slightly improved sequentially on
Q3, indicating a degree of stabilisation in our Automotive and
Electronics end markets in the final quarter, although we remain
cautious on the near-term outlook.
Revenue down 10%
Group revenue was GBP294.0m, 10% down on the prior year (FY
2018: GBP326.0m), impacted by the weaker trading performance, but
with an improved sales mix as Medical continued to show some
growth. Group revenue in constant currency(1) was 11% down on the
prior year (FY 2018: GBP331.8m in constant currency).
Solid performance in Medical, offset by Industrial
Medical revenues were GBP57.7m, 4% ahead of the prior year (FY
2018: GBP55.6m) and 1% ahead in constant currency(1) . H2 2019 saw
an improved performance against a tougher comparative, with
revenues 6% ahead. Growth in Medical has been driven principally
from Asia-Pacific, including in Spine, Arthroscopy and Cranio
Maxillo Facial (CMF) applications. Whilst PEEK continues to be the
material of choice in spinal fusion, the challenge from titanium
expandable cage applications remains, as well as 3D printed porous
titanium cages, although our investment in Bond 3D - to focus on 3D
printing in Medical - is showing good initial results. Pleasingly,
progress in our next generation PEEK-OPTIMA(TM) HA Enhanced product
for Spine was strong, with double-digit revenue growth over the
year.
Our Industrial division reported revenues of GBP236.3m, 13% down
on the prior year (FY 2018: GBP270.4m), impacted by weaker trading
within Automotive, Electronics and the combined impact within Value
Added Resellers. Excluding the large Consumer Electronics contract,
Electronics was 13% down, whilst we saw growth in the Oil & Gas
part of Energy & Other Industrial, and delivered a good
performance in Aerospace.
ASP ahead on improved mix
Our Average Selling Price (ASP) of GBP78/kg was 5% better than
the prior year (FY 2018: GBP74/kg), with the benefit of a stronger
mix. With our assumptions for Medical to remain solid and our
near-term caution around Automotive, Electronics and VAR within
Industrial, as well as a currency tailwind, at this early stage ASP
for FY 2020 is expected to be slightly ahead of FY 2019.
Whilst we have competition in our markets, our focus on
differentiation and value added semi-finished products, with a
higher price point, will be a key driver of ASP and margin
percentage over the coming years.
Losses on foreign currency net hedging
Following adoption of IFRS 9 on 1 October 2018, any fair value
gains and losses on foreign currency contracts, where net hedging
is applied on cash flow hedges, are required to be separately
disclosed on the face of the Income Statement. In FY 2019, a loss
of GBP5.9m has been recognised accordingly, largely from USD
contracts where the deal rate obtained (placed up to 12 months in
advance in accordance with the Group's hedging policy) was adverse
to the average exchange rate prevailing at the date of the related
hedged transactions. In the comparative period, all corresponding
gains and losses on foreign currency contracts were included within
the line item of the underlying hedged transaction and totalled a
net gain of GBP4.3m.
Currency, raw material and energy inflation impacting gross
margin
Group gross margin of 60.0% (FY 2018: 63.8%) was materially
lower than the prior year, impacted by adverse currency, which was
approximately half of the margin decline (including the
presentational impact of adopting IFRS 9), raw material and energy
inflation, and lower overhead recovery, as volumes fell.
Our differentiated downstream products are helping to build new
markets for PEEK whilst capturing a higher absolute value share of
each application. Whilst this may cause a slight softening of our
gross margin percentage in the short term, we are confident that
this strategy will increase absolute margin, as well as further
differentiating our business and offering the potential of
sustainable returns.
Underlying PBT down 17% and EPS 17% down
Underlying Group profit before tax (PBT) of GBP106.2m was 17%
down on the prior year (FY 2018: GBP127.5m), reflecting weaker
trading, adverse currency, and raw material and energy inflation.
Operating investment was reined back to ensure the Group focuses on
critical operating items, for example R&D expenditure to
support our mega-programmes. Underlying PBT in constant currency
was down 14%. Reported Group PBT of GBP104.7m was 18% down on the
prior year (FY 2018: GBP127.5m).
Our "front-end" functions of Sales, Marketing and R&D
support existing business growth and our mega-programmes and whilst
we will continue to invest in these areas where appropriate, for FY
2020 we anticipate a similar level of absolute investment compared
to FY 2019. No accrual was made for the Group's employee bonus
scheme - which is based on profit growth - in FY 2019 compared to
approximately GBP12m in the prior year. Based on initial market
expectations assuming profit growth in FY 2020, we expect to accrue
for the employee bonus scheme.
Basic earnings per share of 107.2p was 17% down (FY 2018: 128.8p
per share). The effective tax rate was 11.7%, in line with the
prior year (FY 2018: 13.3%), reflecting the ongoing benefit of
Patent Box.
Adverse currency
Currency was adverse in 2019, with all of the headwind coming in
the first half year, including the GBP5.9m loss on foreign currency
net hedging. Including the effect of raw material and energy
inflation, the Group saw an impact to profit of approximately
GBP6m. For FY 2020, whilst currency is currently indicating a
modest tailwind, we expect this will largely be offset by raw
material and wage inflation, and accrual for our all employee bonus
scheme. We also note the ongoing volatility in currency rates, with
hedging cover being less than 80% at the start of the financial
year FY 2020.
Our hedging policy seeks to substantially protect our cash flows
from currency volatility on a rolling twelve-month basis. The
policy requires that at least 80% (previously 90%) of our cash flow
exposure is hedged for the first six months, then at least 75% for
the second six months of any twelve-month period. The
implementation of the policy is overseen by an Executive Currency
Committee which approves all transactions and monitors the policy's
effectiveness. During FY 2020, the Group expects to review the
ongoing effectiveness of the policy.
Brexit
As previously communicated, the Group continues to consider the
potential impact of Brexit, with a team in place comprised of
senior leaders to manage various contingencies through any
transition period and beyond. For now, existing laws and trading
arrangements are unchanged.
Victrex has indicated previously that the principal risk is a
sustained period when the Group may not be able to import certain
raw materials or export finished goods through Customs, which could
curtail sales if regional inventory levels were depleted. As part
of our contingency plans, additional warehousing for finished goods
stock was secured in mainland Europe (Germany) and China with a
minimum of eight weeks of finished goods stock held outside the UK.
Our German warehouse has been operational since February 2019, with
capability to supply European customers. We also secured additional
raw material stocks. Group inventories reached GBP92.2m in FY 2019
as a consequence (FY 2018: GBP69.3m) and with continued uncertainty
over Brexit, as well as reduced production availability in our
polymer assets due to debottlenecking, we anticipate maintaining a
continued higher level of inventory through FY 2020.
Whilst we note the political uncertainty, our assessment of the
potential financial impact of a 'no deal' Brexit is based on
standard WTO tariffs being applied, bringing increased costs in the
short term through the application of duties to the import of
certain raw materials and on the export of finished goods. This
short term cost would be partially mitigated by the impact on the
unhedged portion of our currency flows in the event of any
weakening of Sterling. Once existing hedges roll off, there is also
the potential for weaker Sterling to provide a tailwind in the
event of a 'no deal' scenario. As the only current manufacturer of
PEEK products in the EU, we also have the opportunity to seek
tariff mitigation that may be available to us, although we note
this option could reasonably be expected to take up to a year to
secure.
Investment to drive growth
Our "front-end" Sales, Marketing, Technical Service and R&D
capabilities are critical to our ongoing success and are the focus
of our investment to support growth, alongside the appropriate
Quality resource.
Operating overheads, before exceptional items of GBP1.5m and
profit related remuneration (bonus, LTIP and share options) of
GBP1.1m, increased by 5% to GBP69.6m (FY 2018: GBP66.6m) reflecting
further investment in the "front-end" activities noted above.
Profit related remuneration reduced by GBP13.4m, primarily
reflecting a zero accrual for the all employee bonus scheme.
Exceptional items of GBP1.5m relate to acquisition costs. Research
& Development investment was GBP18.0m (FY 2018: GBP17.4m)
representing approximately 6% of revenues(1) .
For FY 2020, we expect operating overheads (excluding bonus) to
be slightly ahead of FY 2019, although we will focus on cost
efficiencies that will be reinvested in support of growth where
possible. Based on market expectations of profit growth in FY 2020,
the Group will also accrue for the all employee bonus scheme, which
is based on underlying PBT growth. As a consequence, we anticipate
total overheads will be modestly ahead of FY 2019. As noted below,
the Group will embark on a major de-bottlenecking project at its
Hillhouse site in FY 2020. This is likely to lead to an extended
shutdown and a period of under-recovered overheads, which we
anticipate treating as an exceptional item. Together with
anticipated M&A costs, the exceptional charge in FY20 is
expected to be GBP10m - GBP12m.
Investment to support downstream strategy
Capital expenditure was GBP22.7m (FY 2018: GBP9.9m) and our
guidance for normalised Group capital expenditure over the
medium-term cycle remains at approximately GBP20m-GBP25m, or around
6% of sales. FY 2019 expenditure has included investment in our
Aerospace Loaded Brackets and composite parts facility, which
became operational during the year. This supported our first
commercial orders based on our AE(TM) 250 polymer grade, which has
pre-qualification with the major aerospace manufacturers. We have
also continued to invest in our Automotive PEEK Gears facility as
it develops its capabilities for a range of potential customers and
applications.
We made two investments during the period in support development
of our Polymer & Parts strategy, which once fully invested,
will have a combined potential investment value of up to GBP20m. A
small equity investment was made in UK-based Surface Generation
Limited, to form a partnership utilising potentially state of the
art manufacturing processes, which will support Victrex's mega
programmes. The PtFS (Production to Functional Specification)
technology offers the potential for enhanced manufacturing
effectiveness beyond standard moulding technology, including
driving reductions in energy consumption and cycle times required
to process the most complex material and part combinations.
The Group also invested in Bond 3D High Performance Technology
BV, a Dutch company developing unique, IP protectable 3D printing
(Additive Manufacturing) processes which are capable of producing
high strength parts from existing grades of PEEK and PAEK polymers.
The investment offers the potential of utilising this technology to
help accelerate the market adoption of 3D printed PEEK parts, with
particular emphasis on the Medical market. Good progress has
already been made, particularly in the opportunity for porous PEEK
cages.
Debottlenecking' investment underway
'Debottlenecking' of our existing Hillhouse polymer
manufacturing facilities is underway, which will allow the site to
move towards its 'nameplate' capacity of 7,150 tonnes. At a capital
cost of approximately GBP15m, weighted to FY 2020, this represents
an efficient and smart use of cash, as well as enabling us to defer
any large-scale organic capacity investment by a number of years.
The project will result in an extended shutdown during FY 2020,
which will lead to under-recovered overhead in the region of GBP8m
- GBP10m, which we intend to treat as an exceptional charge. This
project also influenced our inventory build, to ensure we
effectively manage security of supply for our customers during an
extended shutdown of our polymer manufacturing facilities. We
continue to keep up to date with options for both organic and
inorganic investments, ensuring we have capacity ahead of demand,
particularly noting some of our potentially high volume
mega-programmes and supporting specific geographical opportunities
for growth.
Mega-programme progress
Whilst trading was tough through FY 2019, pleasingly we
continued to see milestones delivered in our Mega-programmes and
new product pipeline.
Our PEEK Gears are now 'on the road' following a first supply
agreement in 2018. Thanks to the capabilities we acquired through
the Kleiss Gears acquisition, we are able to design, develop and
manufacture PEEK based gears, although partnerships for
manufacturing will be the focus going forward, ensuring Victrex
retains the Intellectual Property (IP) but is able to help
accelerate the market for PEEK Gears. We now have several contracts
in place, as well as over 10 development programmes with major car
manufacturers. We had also noted in July that a contract with a
major OEM had been secured, which was the first of several
programmes with this customer. This has now been rescoped although
our technical standing with that OEM remains strong and we are
excited about the potential for a broader range of developments
with them.
Our Aerospace Loaded Brackets programme is benefiting from the
completion of our TxV Aero Composites manufacturing facility in the
US, which gives us the capability to manufacture parts that fly.
Whilst the initial focus is on revenue earning prototype parts with
all major airframe manufacturers, first commercial orders have been
secured for interior parts, meaning the first composite parts
manufactured in our US facility are expected to be in the air on a
near-term basis, supporting the opportunity of meaningful revenue
in FY 2020.
For the longer term, we have signed a development alliance with
Airbus, as part of its 'Clean Sky 2' programme, which has now
become our 'Aerospace Structures' mega-programme. The alliance will
support the development and commercialisation of thermoplastic
composites in Aerospace over the coming years, with a focus on both
larger primary and secondary Aerospace structures. With projections
of approximately 37,000 new or replacement aircraft required
globally by 2037 (source: Airbus), this alliance will build on the
attractive long-term opportunities in this market, offering further
growth opportunities for Victrex over the next decade. This
opportunity is incremental to Victrex's Aerospace Loaded Brackets
programme. Victrex's AE(TM) 250 composites grade will be integral
to both of these opportunities.
Magma saw a lower level of revenue for FY 2019 as a whole
against a tougher comparative although medium term opportunities
remain attractive. TechnipFMC continue to focus on the potential
within the Libra field development in Brazil, with significant time
and resource being deployed on their part to ensure the capability
is in place and for pre-qualification work. Ahead of the outcome of
the Libra pre-development work over the next 18 months using a
Hybrid Flexible Pipe (HFP) model, other opportunities exist with
Ocyan as part of a Composite Riser opportunity, which would also
use a Magma based solution.
In Medical, we made good progress with our PEEK-OPTIMA(TM) HA
Enhanced product, with double-digit sales growth. Our focus to grow
our non-Spine business in Dental has been slower than we
anticipated, where we signed a customer agreement with Straumann
Dental in 2018. Our Invibio Dental product (Juvora(TM) ) continues
to have a good clinical proposition and we believe the medium to
long term opportunity remains attractive, although additional
distribution agreements will need to be secured to gain further
market penetration.
With a collaboration agreement in Trauma - with a top 5 player -
we continue to use clinical data and marketing awareness through
trade shows and key opinion leaders to support this programme. In
Knee, and through our partner Maxx, the clinical trial in Italy is
now underway. The trial is expected to run for a minimum of 18
months, with 30 patients. We are also focusing on securing a second
OEM partner in this programme.
Strong balance sheet
Our growth investment and security of supply to our customers is
underpinned by our strong balance sheet. Net assets at 30 September
2019 totalled GBP461.6m (FY 2018: GBP489.9m). With our Brexit
contingency plans and support for debottlenecking, inventories
increased to GBP92.2m (FY 2018: GBP69.3m), as we saw stock build in
Europe and globally. Subject to no disruption to ports and supply
routes, and successful completion of debottlenecking, we would
expect to start to unwind this inventory position over two
financial years, starting late in FY 2020 and into FY 2021.
Robust cash generation
Cash generated from operations was GBP90.3m (FY 2018: GBP135.8m)
representing an operating cash conversion(1) of 87% (FY 2018: 107%)
reflecting the increased inventory and unwind of the FY18 bonus
accrual. Available cash (with no debt) at 30 September 2019 was
GBP72.8m (FY 2018: GBP144.4m), based on available cash(1) , which
includes cash held on deposit. In February 2019 we paid the 2018
full year final dividend of 46.14p/share and the special dividend
of 82.68p/share, whilst in July 2019 we paid the interim dividend
of 13.42p/share. Combined, dividend payments in FY 2019 totalled
GBP122.4m (FY 2018 dividends paid: GBP105.6m).
Taxation
The Group's effective tax rate reflects the associated benefit
from Victrex filing patents as part of its unique chemistry and IP,
through the UK government's 'Patent Box' scheme. The effective tax
rate of 11.7% for FY 2019 (FY 2018: 13.3%), also reflects the
deferred tax impact of profit in stock consolidation adjustments
from building overseas inventory.
Dividends
Retaining the flexibility to invest in support of our growth
remains our top priority, whether that is through capital
expenditure, M&A, joint arrangements or partnerships. Whilst an
investment decision for any organic multi-year polymer
manufacturing capacity has been deferred for a number of years, a
range of options continue to be assessed, both organic and
inorganic. The Board assessed several distribution options for
future shareholder returns during FY 2018, whilst noting these
investment needs. As a result, our capital allocation policy has
been retained, which is to grow the regular dividend broadly in
line with earnings, whilst maintaining dividend cover(1) around 2x,
and retain the threshold for payment of a special dividend at
50p/share subject to no additional investment requirements.
With the Group delivering a weaker performance in FY 2019 and
some key industrial markets remaining weak, the final dividend will
be held flat at 46.14p/share (FY 2018: 46.14p/share), with dividend
cover at 1.8x (FY 2018: 2.2x). With year end net cash not exceeding
the GBP85m threshold, no special dividend is proposed.
Outlook
Looking forward, Automotive and Electronics are showing signs of
stability, although we will retain some caution on these markets at
this early stage, with an initial assumption that current trends
will continue through the first half year. Our cost-effective
debottlenecking project is underway, enabling Victrex to gain
significant incremental capacity in support of our medium-term
growth programmes, although an extended shutdown will mean some
under recovered overheads. On a full year basis, currency offers a
modest tailwind although this will be offset to a large degree by
some limited incremental operating investment, cost inflation and
our employee bonus scheme. Overall, we remain focused on making
year-on-year progress and our Polymer & Parts strategy keeps us
well placed to deliver our medium to long term growth
opportunities.
Jakob Sigurdsson
Chief Executive
5 December 2019
(1) Alternative performance measures are defined on page 12.
DIVISIONAL REVIEW
Industrial
12 months 12 months
ended ended %
30 Sep 30 Sep % Change
2019 2018 Change (constant
GBPm GBPm (reported) currency)
-------------- ---------- ---------- ----------- ----------
Revenue 236.3 270.4 -13% -14%
Gross profit 128.2 158.6 -19% -18%
-------------- ---------- ---------- ----------- ----------
Group performance is reported through the Industrial and Medical
divisions although we continue to provide a market based summary of
our performance and growth opportunities. The Industrial division
includes the markets of Energy & Other Industrial (including
Manufacturing & Engineering), Value Added Resellers, Transport
(Automotive & Aerospace) and Electronics.
Our Industrial business delivered revenue of GBP236.3m (FY 2018:
GBP270.4m), 13% lower than the prior year, reflecting the weaker
Automotive, Electronics and Value Added Resellers markets, and the
year on year comparative from negligible volumes as part of the
large Consumer Electronics contract. Revenue in constant currency
was also down 14%. Gross margin fell to 54.3% (FY 2018: 58.7%),
reflecting the impact of currency (including the change in
presentation of gains and losses on foreign currency contracts),
raw material and energy inflation, and lower overhead recovery as
volumes fell.
Energy & Other Industrial
Our Energy & Other Industrial market (which includes volumes
reported for Manufacturing & Engineering) saw sales volume of
673 tonnes, which was flat on the prior year (FY 2018: 680 tonnes),
with Oil & Gas up 6% overall. Whilst rig count in 2019 has
reduced through the year, robust oil prices and activity continues
to be supportive to sales. Our Magma oil & gas mega-programme
saw lower year on year revenue as anticipated, principally
reflecting completion of specific projects in FY 2018. The
long-term opportunity offshore in Brazil with TechnipFMC continues
to support the proposition, with significant time and resource
being allocated to this opportunity by TechnipFMC and Magma, with
Victrex supporting the material requirements.
Manufacturing & Engineering (M&E) remains a relatively
new area for Victrex, which focuses on new or incremental
applications in fluid handling, food contact materials and
manufacturing equipment applications, where metal replacement
requirements are increasing. M&E saw a challenging year as
industrial activity weakened globally.
Value Added Resellers
Value Added Resellers (VAR) combines a mix of long term
'Channels' business, where processors or compounders are using our
PEEK materials for part or component manufacturing specified by end
users and OEMs, together with more variable demand requirements as
the "pull" from Industrial markets using Victrex(TM) PEEK continues
to grow. Because of the fragmented nature of the industrial supply
chain, once PEEK has been specified by end users, full clarity on
the exact route to market for all of our polymer business is not
always possible. This channel to market also typically sees greater
levels of destocking as processors or compounders typically reduce
inventories in higher value materials when end market demand drops.
Sales volume of 1,463 tonnes was 17% lower than last year (FY 2018:
1,766 tonnes), principally reflecting the impact of business being
supplied into the Automotive and Electronics markets, together with
some destocking.
Transport (Automotive & Aerospace)
Structural megatrends including lightweighting, CO2 reduction,
durability, comfort and heat resistance continue to support the
long-term outlook for Transport markets. Sales volume declined 8%
to 950 tonnes (FY 2018: 1,035 tonnes), primarily driven by the
impact of the World Light Vehicle Testing Programme (WLTP) on
Automotive, offset by growth in Aerospace, as plane build and PEEK
penetration increases.
Automotive
The global emissions testing regime and weaker demand impacted
sales into this market. Volumes fell by 12%, with significant
volatility between quarters (Q1 volumes were down 23%). Market data
from IHS forecasts a decline in car build of approximately 6%
during 2019, with Victrex volumes weaker than the overall market
due to destocking.
On a medium to long term view, PEEK remains well placed for both
internal combustion engines and hybrids. Electric vehicles (EVs),
whilst still emerging, offer further opportunities for our
materials, with slot-liners, wire coating and other applications.
PEEK's properties of durability, chemical, electrical and heat
resistance play well here. Whilst EV opportunities remain at a very
early stage, early indications suggest a long-term potential for
over 100g per EV application and with more "value" rather than
simply "volume" business, we continue to work on several
differentiated products and development programmes in this
area.
Following our PEEK Gears "on the road" deployment in 2018 and
two other smaller contracts, we now have over 10 development
programmes to support the medium to long term revenue opportunity,
although meaningful revenue will now be later than our original
assumption of FY 2019, reflecting the rescoping of a US OEM
contract. PEEK gears based on Victrex(TM) HPG PEEK can offer a 50%
performance and noise vibration and harshness (NVH) benefit
compared to metal gears, as well as contributing to the trend for
minimising CO2 emissions through weight & inertia reduction,
and quicker manufacturing compared to metal. To help scale this
opportunity further, we will partner with manufacturing companies
to support a wider roll-out, whilst retaining the development
know-how. A PEEK Gear offers the potential of approximately 20
grams per application.
Aerospace
Aerospace performed well, with 5% growth in sales volume,
reflecting penetration and build rates. Brackets, fasteners and
other applications continue to offer incremental translation
opportunities. Medium term growth prospects look positive as build
rates and the use of composites and differentiated products
increase. Light-weighting and the ability to reduce manufacturing
cycle time by up to 40% is a key selling point for our PEEK and
PAEK polymers. Beyond this, our differentiated polymer grades, such
as our AE(TM) 250 (low-melt) version continue to progress,
alongside our focus on product forms and parts, such as film and
our Aerospace Loaded Brackets opportunity.
Our new TxV US manufacturing facility in Rhode Island, US, is
now manufacturing commercial parts, with capability to deliver
approximately 150 tonnes of composite parts per year initially, to
prove out the benefits. Our development alliance with Airbus as
part of their 'Clean Sky 2' programme will also offer opportunities
in larger primary and secondary structures - now part of our
Aerospace Structures mega-programme - although the revenue
opportunity here is around five years away.
Electronics
Electronics volumes fell 36% to 481 tonnes (FY 2018: 746
tonnes), principally reflecting negligible volumes from the large
Consumer Electronics order - compared to approximately 200 tonnes
in 2018 - lower volumes for an emerging consumer application and
weaker Semiconductor markets. Small Space Acoustics, which sees our
Aptiv(TM) film used in smartphones, was weaker this year, offset by
some growth in Home Appliances.
Regional trends
Regional trends show Europe was down 14%, with 1,974 tonnes (FY
2018: 2,308 tonnes), reflecting the weakness in Automotive and
Value Added Resellers, and slower Industrial markets more
generally. Asia-Pacific was down 24% to 961 tonnes (FY 2018: 1,264
tonnes) principally from Electronics, whilst US volumes were
steady, 2% down at 816 tonnes (FY 2018: 835 tonnes) reflecting
growth in Energy, offset by Electronics and Value Added
Resellers.
Medical
12 12
months months
Ended ended %
30 Sep 30 Sep % Change
2019 2018 Change (constant
GBPm GBPm (reported) currency)
-------------- -------- -------- ----------- ----------
Revenue 57.7 55.6 4% 1%
Gross profit 48.1 49.4 -3% -1%
-------------- -------- -------- ----------- ----------
Revenue in Medical was up 4% at GBP57.7m (FY 2018: GBP55.6m),
reflecting a stable second half year against a tougher comparative.
In constant currency, Medical revenue was 1% ahead, continuing the
stable trend seen during FY 2018 as share within the US Spine
market stabilises. Medical sales are heavily US Dollar denominated,
with the average spot rate in the current period impacting us,
reflecting rates being adverse to the effective rate in FY 2018,
which benefited from deals placed in the FY 2017 financial year.
Gross profit was GBP48.1m (FY 2018: GBP49.4m) and gross margin was
lower at 83.4% (FY 2018: 88.8%). This partly reflected sales mix
and an increasing portion of non-Spine sales, particularly from
Asia, with the remaining impact being due to currency, including
the presentational impact of adopting IFRS 9, which accounts for
approximately a third of the margin decline.
Geographically, Asia-Pacific saw strong growth, up 79%,
including China which saw revenue increase by 123%, offset by a
decline in the US of 7% and a stable European market. Asia-Pacific
growth principally reflects both Spine, as new approvals are
secured, and some non-Spine areas such as Cranio Maxillo-Facial
(CMF) and Arthroscopy.
Medical market overview
Our medium-term focus is to diversify our Medical business into
non-Spine areas, as well as seeking growth in Spine through
emerging geographies, and new innovative products. Our premium and
differentiated PEEK-OPTIMA(TM) HA Enhanced product - to drive next
generation Spine procedures - is one part of our strategy to grow
our Medical business. Approximately 60% revenue growth was seen in
this product during FY 2019 and we also saw this product used in a
new 'Hammertoe' application outside of the Spine market.
Mega-programmes
As previously communicated, our Invibio Dental (Juvora(TM) )
branded products have been slower than anticipated following our
distribution agreement with Straumann in 2018 and we continue to
expect additional agreements will be needed to help market
penetration. The medium-term opportunity remains attractive for
Dental and the clinical proposition - with lower peri-implantitis
rates in PEEK solutions after five years compared to Titanium -
remains strong. A recent additional study via the well-regarded
Malo Clinic, based on 3 year clinical data, further validated our
Dental proposition.
Our emphasis is on the prosthetic dental market - frames,
bridges and partials - rather than the full jaw-based implant, with
the Invibio Dental offering focused on improving quality of life
and clinical outcomes for patients, whilst offering manufacturing
efficiency benefits.
In Trauma, we successfully signed a collaboration agreement with
a top 5 Trauma player last year. We are also continuing to work
with smaller innovative players through development agreements.
Our PEEK composite Trauma plates offer the potential for 50
times better fatigue resistance compared to a metal plate. The
awareness of composites as a viable metal alternative is growing
and we have the manufacturing capability to meet initial
demand.
The $6 billion global knee replacement market continues to
demand alternatives. With 1 in 5 patients dissatisfied with their
knee surgery, typically those using metal based solutions, patient
demand for alternatives is growing. The Knee clinical trial is
underway, with approximately 30 patients being recruited via an
Italian hospital. We expect the trial to run for approximately 18
months to two years. Whilst our existing partnership with Maxx
Orthopedics is working well, we continue to seek an additional OEM
partner to help drive awareness and support the value proposition
prior to market penetration.
Alternative performance measures:
We use alternative performance measures to assist in presenting
information in an easily comparable, analysable and
comprehensible
form. The measures presented in this report are used by the
Board in evaluating performance. However, this additional
information presented is not required by IFRS or uniformly defined
by all companies. Certain measures are derived from amounts
calculated in accordance with IFRS but are not in isolation an
expressly permitted GAAP measure. The measures are as follows:
-- Operating profit before exceptional items (referred to as underlying operating profit) and profit before tax and
exceptional items (referred to as underlying profit before tax) are based on operating profit and PBT before the
impact of exceptional items. These metrics are used by the Board to assess the underlying performance of the
business excluding items that are, in aggregate, material in size and / or unusual or infrequent in nature.
Exceptional items for 2019 are GBP1.5m relating to acquisition related costs. Further details are disclosed in
note 3;
-- Constant currency metrics are used by the Board to assess the year on year underlying performance of the business
excluding the impact of foreign currency rates, which can by nature be volatile. Constant currency metrics are
reached by applying current year (FY 2019) weighted average spot rates to prior year (FY 2018) transactions. In
the current period, gains and losses on foreign currency net hedging are shown separately in the Income Statement,
following adoption of IFRS 9 and are excluded from the constant currency calculation;
-- Operating cash conversion is used by the Board to assess the business's ability to convert operating profit to
cash effectively, excluding the impact of investing and financing activities. Operating cash conversion is cash
generated from operations / operating profit;
-- Available cash is used to enable the Board to understand the true cash position of the business when determining
the use of cash under the capital allocation policy. Available cash is cash and cash equivalents plus other
financial assets (cash invested in term deposits greater than three months in duration); and
-- Dividend cover is used by the Board to measure the affordability and sustainability of the regular dividend.
Dividend cover is earnings per share/total dividend per share. This excludes the special dividend.
-- Research and development expenditure as a % of Group sales is used by the Board because R&D spend is considered
to be a leading indicator of the Group's ability to innovate into new applications, supporting future growth. The
Group targets spend at c5%--6% of Group revenues.
CONSOLIDATED INCOME STATEMENT
for the year ended 30 September
2019 2018
Note GBPm GBPm
------------------------------------- ---------------------------------- ------------------------ ---------
Revenue 2 294.0 326.0
Losses on foreign currency
net hedging(1) -
Cost of sales (5.9) (118.0)
------------------------------------- ---------------------------------- ---------
(111.8)
------------------------------------- ---------------------------------- ------------------------ ---------
Gross profit 2 176.3 208.0
Sales, marketing and administrative
expenses (72.2) (81.1)
------------------------------------- ---------------------------------- ------------------------ ---------
Operating profit before exceptional
items 105.6 126.9
Exceptional items (1.5) -
Operating profit 104.1 126.9
Financial income 0.7 0.6
Share of loss of associate (0.1) -
------------------------------------- ---------------------------------- ------------------------ ---------
Profit before tax and exceptional
items 127.5
Exceptional items 106.2 -
------------------------------------- ---------
(1.5)
------------------------------------- ------------------------------------------------------------ ---------
Profit before tax 104.7 127.5
Income tax expense(2) 3 (12.3) (16.9)
------------------------------------- ---------------------------------- ------------------------ ---------
Profit for the period attributable
to owners of the parent 92.4 110.6
------------------------------------------------------------------------- ------------------------ ---------
Earnings per share
Basic 107.2p 128.8p
Diluted 106.9p 128.2p
------------------------------------- ---------------------------------- ------------------------ ---------
Dividends
Interim 13.42p 13.42p
Final 46.14p 46.14p
Special - 82.68p
59.56p 142.24p
------------------------------------- ---------------------------------- ------------------------ ---------
A final dividend in respect of 2019 of 46.14p per ordinary share
has been recommended by the Directors for approval at the Annual
General Meeting in February 2020.
1 Losses on foreign currency contracts, when net hedging is applied
on cash flow hedges, are disclosed separately within gross margin
on adoption of IFRS 9.
2 Taxation on exceptional items in the current year has reduced
the charge by GBP0.1m (2018: GBPnil).
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
for the year ended 30 September
2019 2018
GBPm GBPm
------------------------------------- -------- --------
Profit for the period 92.4 110.6
-------------------------------------- -------- --------
Items that will not be reclassified
to profit or loss
Defined benefit pension schemes'
actuarial (losses)/gains (5.9) 5.6
Income tax on items that will
not be reclassified to profit
or
loss 1.0 (0.9)
-------------------------------------- -------- --------
(4.9) 4.7
Items that may be subsequently
reclassified to profit or
Loss
Currency translation differences
for foreign operations 2.7 1.1
Effective portion of changes
in fair value of cash flow hedges (7.5) (4.6)
Net change in fair value of
cash flow hedges
transferred to profit or loss 5.9 (4.3)
Income tax on items that may
be reclassified to profit or
loss 0.3 2.0
1.4 (5.8)
Total other comprehensive expense
for the period (3.5) (1.1)
Total comprehensive income for
the period
attributable to owners of the
parent 88.9 109.5
-------------------------------------- -------- --------
CONSOLIDATED BALANCE SHEET
for the year ended 30 September
2019 2018
GBPm GBPm
--------------------------------------- ------- -------
Assets
Non-current assets
Property, plant and equipment 260.8 253.4
Intangible assets 27.4 27.6
Investment in associated undertakings 8.2 -
Financial assets held at fair
value through profit and loss 8.0 4.5
Deferred tax assets 10.5 7.2
Retirement benefit asset 9.1 13.5
---------------------------------------- ------- -------
324.0 306.2
--------------------------------------- ------- -------
Current assets
Inventories 92.2 69.3
Current income tax assets 0.7 0.1
Trade and other receivables 45.0 42.7
Derivative financial instruments 1.5 1.1
Other financial assets 0.3 73.2
Cash and cash equivalents 72.5 71.2
---------------------------------------- ------- -------
212.2 257.6
--------------------------------------- ------- -------
Total assets 536.2 563.8
---------------------------------------- ------- -------
Liabilities
Non-current liabilities
Deferred tax liabilities (21.6) (22.5)
(21.6) (22.5)
--------------------------------------- ------- -------
Current liabilities
Derivative financial instruments (12.6) (9.3)
Current income tax liabilities (10.3) (5.3)
Trade and other payables (30.1) (36.8)
---------------------------------------- ------- -------
(53.0) (51.4)
--------------------------------------- ------- -------
Total liabilities (74.6) (73.9)
---------------------------------------- ------- -------
Net assets 461.6 489.9
---------------------------------------- ------- -------
Equity
Share capital 0.9 0.9
Share premium 52.3 48.0
Translation reserve 6.5 3.8
Hedging reserve (4.7) (3.4)
Retained earnings 406.6 440.6
---------------------------------------- ------- -------
Total equity attributable to owners
of the parent 461.6 489.9
---------------------------------------- ------- -------
CONSOLIDATED CASH FLOW STATEMENT
For the year ended 30 September
2019 2018
GBPm GBPm
Profit after tax for the year 92.4 110.6
Income tax expense 12.3 16.9
Financial income (0.7) (0.6)
Share of loss of associate 0.1 -
Operating profit 104.1 126.9
Adjustments for:
Depreciation 15.1 15.3
Amortisation 2.3 2.7
Loss on disposal of non-current
assets 0.1 0.7
Increase in inventories (21.0) (7.1)
Increase in receivables (2.6) (5.6)
(Decrease)/increase in payables (9.3) 1.9
Equity-settled share-based payment
transactions 2.1 2.6
Losses on derivatives recognised
in income statement that have
not yet settled 1.0 2.6
Retirement benefit obligations
charge less contributions (1.5) (4.2)
----------------------------------------- -------- --------
Cash generated from operations 90.3 135.8
Interest received 0.7 0.6
Tax paid (10.9) (7.4)
----------------------------------------- -------- --------
Net cash flow generated from operating
activities 80.1 129.0
----------------------------------------- -------- --------
Cash flow used in investing activities
Acquisition of property, plant
and equipment and intangible assets (22.7) (9.9)
Decrease/(increase) in other financial
assets 72.9 (73.2)
Cash received from investments - 5.5
Cash consideration of acquisitions (11.8) -
in associated undertakings and
unquoted investments
Net cash flow generated from/(used
in) investing activities 38.4 (77.6)
----------------------------------------- -------- --------
Cash flow used in financing activities
Proceeds from issue of ordinary
shares exercised under option 4.3 5.0
Dividends paid (122.4) (105.6)
----------------------------------------- -------- --------
Net cash flow used in financing
activities (118.1) (100.6)
----------------------------------------- -------- --------
Net increase/(decrease) in cash
and cash equivalents 0.4 (49.2)
Effect of exchange rate fluctuations
on cash held 0.9 0.3
Cash and cash equivalents at beginning
of year 71.2 120.1
----------------------------------------- -------- --------
Cash and cash equivalents at end
of year 72.5 71.2
----------------------------------------- -------- --------
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Share Share Translation Hedging Retained
capital premium reserve reserve earnings Total
GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------------------- --------- --------- ------------ --------- ---------- --------
Equity at 1 October 2017 0.9 43.0 2.7 3.8 428.0 478.4
-------------------------------------- --------- --------- ------------ --------- ---------- --------
Total comprehensive income
for the year
Profit - - - - 110.6 110.6
-------------------------------------- --------- --------- ------------ --------- ---------- --------
Other comprehensive income/(expense)
Currency translation differences
for foreign operations - - 1.1 - - 1.1
Effective portion of changes
in fair value of cash flow
hedges - - - (4.6) - (4.6)
Net change in fair value
of cash flow hedges transferred
to profit or loss - - - (4.3) - (4.3)
Defined benefit pension
schemes' actuarial gains - - - - 5.6 5.6
Tax on other comprehensive
income/(expense) - - - 1.7 (0.6) 1.1
-------------------------------------- --------- --------- ------------ --------- ---------- --------
Total other comprehensive
income/(expense) for the
year - - 1.1 (7.2) 5.0 (1.1)
Total comprehensive income/(expense)
for the year - - 1.1 (7.2) 115.6 109.5
Contributions by and distributions
to owners of the Company
Share options exercised - 5.0 - - - 5.0
Equity-settled share-based
payment transactions - - - - 2.6 2.6
Dividends to shareholders - - - - (105.6) (105.6)
-------------------------------------- --------- --------- ------------ --------- ---------- --------
Equity at 30 September
2018 0.9 48.0 3.8 (3.4) 440.6 489.9
-------------------------------------- --------- --------- ------------ --------- ---------- --------
Total comprehensive income
for the year
Profit - - - - 92.4 92.4
-------------------------------------- --------- --------- ------------ --------- ---------- --------
Other comprehensive income/(expense)
Currency translation differences
for foreign operations - - 2.7 - - 2.7
Effective portion of changes
in fair value of cash flow
hedges - - - (7.5) - (7.5)
Net change in fair value
of cash flow hedges transferred
to profit or loss - - - 5.9 - 5.9
Defined benefit pension
schemes' actuarial losses - - - - (5.9) (5.9)
Tax on other comprehensive
income - - - 0.3 1.0 1.3
-------------------------------------- --------- --------- ------------ --------- ---------- --------
Total other comprehensive
income/(expense) for the
year - - 2.7 (1.3) (4.9) (3.5)
-------------------------------------- --------- --------- ------------ --------- ---------- --------
Total comprehensive income/(expense)
for the year - - 2.7 (1.3) 87.5 88.9
Contributions by and distributions
to owners of the Company
Share options exercised - 4.3 - - - 4.3
Equity-settled share-based
payment transactions - - - - 2.1 2.1
Tax on share-based payment
transactions - - - - (1.2) (1.2)
Dividends to shareholders - - - - (122.4) (122.4
-------------------------------------- --------- --------- ------------ --------- ---------- --------
Equity at 30 September
2019 0.9 52.3 6.5 (4.7) 406.6 461.6
-------------------------------------- --------- --------- ------------ --------- ---------- --------
Notes to the Financial Report
1. Basis of preparation
General information
Victrex plc (the 'Company') is a limited liability company
incorporated and domiciled in the United Kingdom. The address of
its registered office is Victrex Technology Centre, Hillhouse
International, Thornton Cleveleys, Lancashire FY5 4QD, United
Kingdom.
The consolidated financial statements of the Company for the
year ended 30 September 2019 comprise the Company and its
subsidiaries (together referred to as the 'Group').
The Company is listed on the London Stock Exchange.
The consolidated financial statements were approved for issue by
the Board of Directors on 5 December 2019.
Basis of preparation
Both the consolidated and Company financial statements have been
prepared on the basis of the accounting policies set out in the
Group's last Annual Report and Accounts except for the application
of relevant new standards. A number of new standards and amendments
to existing standards were effective for the financial year ended
30 September 2019. These include:
IFRS 9 - Financial Instruments
This standard was adopted by the Group on 1 October 2018, using
the modified retrospective approach. This standard replaces IAS 39
- Recognition and Measurement. The main changes the new standard
introduces are:
-- new requirement for the classification and measurement of
financial assets;
-- a new impairment model for financial assets held at amortised
cost based on expected credit losses; and
-- changes to hedge accounting by aligning hedge accounting more
closely to an entity's risk management objectives.
The main impacts for the Group of adopting IFRS 9 have been:
(1) The Group's approach to currency hedging meets the criteria
to be net hedged under IFRS 9. In accordance with IFRS 9, this has
resulted in a presentational change on the face of the income
statement for the year ended 30 September 2019, with the fair value
gains and losses recognised on cash flow hedges being disclosed
separately within gross margin, rather than included within the
line item of the underlying hedged transaction. Revenue, cost of
sales and sales, marketing and administration expenses items are,
therefore now recognised at the exchange rate prevailing at the
date of the transaction. For the year ended 30 September 2019, a
loss of GBP5.9m has been recognised separately and note 8 provides
the average exchange rates applied. The revised presentation will
potentially result in an increase in gross margin percentage
volatility.
The Group has applied this change prospectively and used the
practical expedient allowed to de-designate the old IAS 39 hedging
relationships in existence on 1 October 2018 and start a new
hedging relationship under the new IFRS 9 model. Accordingly, no
adjustment to the comparative is required.
(2) Revision of the Group's existing incurred loss provisioning
model for its trade receivables to the required expected credit
loss model. The Group has applied the simplified approach permitted
by IFRS 9, which requires expected lifetime losses to be recognised
from initial recognition of the trade receivables. The resulting
reassessment of the existing provisions on adoption was highly
immaterial on the net assets of the Group. As such no modified
retrospective adjustment has been recognised to the opening balance
sheet as at 1 October 2018, with the impact of moving to the
expected credit loss model being included in the income statement
in the current period.
It is noted that cash and deposits are also subject to the
impairment requirements of IFRS 9; however, there was no identified
impairment loss on these balances.
There has been no significant changes required in classification
or measurement base in the transition to IFRS 9 for Victrex's
financial assets.
IFRS 15 - Revenue from Contracts with Customers
This standard was adopted by the Group on 1 October 2018, using
the modified retrospective approach. IFRS 15 provides a
principles-based approach for revenue recognition, and as
previously reported based on the detailed assessment performed,
there has been no impact on the timing and recognition of revenue
for the sale of goods, which are recognised in line with Incoterms
(either on dispatch or delivery).
IFRS 15 does result in an element of variable consideration in
relation to Medical Unit Payments ('MUP'), which is determined and
contingent on onward sale of a medical device, made from Group
material, by the customer. Under IFRS 15 the Group must now
recognise revenue when the performance obligation is satisfied and
therefore revenue recognition is at the point when the material is
sold by the Group for all new MUP contracts. For existing MUP
contracts in place on 1 October 2018, due to the material to which
the MUP relates not being disclosed by the customer until there is
an onward sale, any assessment of the value of revenue to be
accelerated on adoption is judgemental. Consequently following a
detailed assessment, the Directors concluded that, based on the
judgements made, the amount which would be accelerated is not
material and therefore for existing MUP contracts no modified
retrospective adjustment to the opening balance sheet as at 1
October 2018 has been made and no revenue has been accelerated.
A number of standards, amendments and interpretations have been
issued and endorsed by the EU but are not yet effective and,
accordingly, the Group has not yet adopted them. These include:
IFRS 16 - Leases
This standard is effective for accounting periods beginning on
or after 1 January 2019 and will be adopted by the Group on 1
October 2019. The new standard eliminates the classification of
leases as either operating leases or finance leases and introduces
a single lessee accounting model. The main changes arising on the
adoption of IFRS 16 will be an increase in interest-bearing
borrowings and non-current assets due to obligations to make future
payments under leases that are currently classified as operating
leases being recognised in the Statement of financial position,
along with the related 'right of use' (ROU) asset.
There will be a reduction in expenditure in operating expenses
(within cost of sales and sales, marketing and administrative
costs) and an increase in finance expenses as operating lease costs
are replaced with depreciation and lease interest expense. The
Group has opted to use the practical expedients in respect of
leases of less than 12 months duration and low value assets and
excluded them from the scope of IFRS 16. Rental payments associated
with these leases will continue to be recognised in the income
statement on a straight line basis over the life of the lease.
The adoption of IFRS 16 will require the Group to make several
judgements, estimates and assumptions, which include:
1) The approach to be adopted on transition - the Group will use
the modified retrospective transition method. Lease liabilities
will be determined based on the appropriate incremental borrowing
rates and rates of exchange at the date of transition, being 1
October 2019. ROU asset values will be measured based on the
respective lease liabilities.
2) Incremental Borrowing Rate - the rates used on transition are
the Group's incremental borrowing rates which have been calculated
based on the underlying lease terms and types of asset. The
risk-free rate component has been based on LIBOR rates available in
the same currency and over the same lease term. This incremental
borrowing rate used is in the range 0.65% to 3.95%, with an average
of 2.44%.
3) Estimated lease term - the term of each lease will be based
on the original lease term unless management is reasonably certain
that it will exercise options to extend the lease.
The Directors have carried out a detailed assessment of the
impact of IFRS 16. At transition, ROU assets and lease liabilities
of approximately GBP9.0m will be created. The income statement for
the year ending 30 September 2019 would be adversely impacted at a
profit before tax level of approximately GBP0.1m. In the financial
statements for the year ended 30 September 2018, the Directors
estimated that the lease liability at transition would be GBP6.5m.
The estimate has increased because of rent review increases and new
property leases.
The financial information presented here does not constitute the
Company's statutory accounts for the years ended 30 September 2019
or 2018 but is derived from those accounts. Statutory accounts for
2018 have been delivered to the registrar of companies, and those
for 2019 will be delivered in due course. The auditor has reported
on those accounts; their reports were (i) unqualified, (ii) did not
include reference to any matters to which the auditor drew
attention by way of emphasis without qualifying their report and
(iii) did not contain a statement under section 498 (2) or (3) of
the Companies Act 2006.
Sections of this results statement contain forward-looking
statements, including statements relating to; future demand and
markets for the Group's products and services, research and
development relating to new products and services and liquidity and
capital resources. These forward-looking statements involve risks
and uncertainties because they relate to events that may or may not
occur in the future. Accordingly, actual results may differ
materially from anticipated results because of a variety of risk
factors which are summarised in Note 10.
The accounts for the year ended 30 September 2019 will be posted
to shareholders on 3 January 2020 and will be available from the
Company's Registered Office at Victrex Technology Centre, Hillhouse
International, Thornton Cleveleys, Lancashire, FY4 4QD, United
Kingdom, and online at www.victrexplc.com.
2. Segment reporting
The Group complies with IFRS 8 - Operating Segments which
requires operating segments to be identified and reported upon that
are consistent with the level at which results are regularly
reviewed by the entity's chief operating decision maker. The chief
operating decision maker for the Group is the Victrex plc Board.
Information on the business units is the primary basis of
information reported to the Victrex plc Board. The performance of
the business units is assessed based on segmental gross profit.
Management of sales, marketing and administration functions
servicing both business units is consolidated and reported at a
Group level.
The Group's business is strategically organised as two business
units (operating segments): Industrial, which focuses on our
Automotive, Aerospace, Electronics and Energy markets, and Medical,
which focuses on providing specialist solutions for medical device
manufacturers.
Industrial Medical Group Industrial Medical Group
2019 2019 2019 2018 2018 2018
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------ ---------- ------- ------ ---------- ------- ------
Revenue from external sales 236.3 57.7 294.0 270.4 55.6 326.0
------------------------------------ ---------- ------- ------ ---------- ------- ------
Segment gross profit 128.2 48.1 176.3 158.6 49.4 208.0
Sales, marketing and administrative
expenses (72.2) (81.1)
------------------------------------ ---------- ------- ------ ---------- ------- ------
Operating profit 104.1 126.9
Net financing income 0.7 0.6
Share of loss of associate (0.1) -
------------------------------------ ---------- ------- ------ ---------- ------- ------
Profit before tax 104.7 127.5
Income tax (12.3) (16.9)
------------------------------------ ---------- ------- ------ ---------- ------- ------
Profit for the year attributable to
owners of the Parent 92.4 110.6
------------------------------------ ---------- ------- ------ ---------- ------- ------
Transactions between segments are at arm's length.
3. Exceptional items
Items that are, in aggregate, material in size and / or unusual
or infrequent in nature, are included within operating profit and
disclosed separately as exceptional items in the Consolidated
Income Statement.
The separate reporting of exceptional items, which are presented
as exceptional within the relevant category in the Consolidated
Income Statement, helps provide an indication of the underlying
performance of the Group.
2019 2018
GBPm GBPm
---------------------------------------------------- ------ ------
Included within sales, marketing and administrative
expenses
Acquisition related costs 1.5 -
---------------------------------------------------- ------ ------
Exceptional items before tax 1.5 -
---------------------------------------------------- ------ ------
Tax on exceptional items (0.1) -
---------------------------------------------------- ------ ------
Exceptional items after tax 1.4 -
---------------------------------------------------- ------ ------
Acquisition related costs comprise legal and other non-recurring
costs the Group has incurred directly in the course of acquisition
and investment activity (see note 6). These costs are largely
non-deductible expenses for tax purposes.
4. Taxation
2019 2018
GBPm GBPm
-------------------------------------------------- ----- ---------------
Current tax
UK corporation tax on profits for the year 14.7 13.0
Overseas tax on profits for the year 1.5 3.1
16.2 16.1
Deferred tax
Origination and reversal of temporary differences (3.9) 2.0
(3.9) 2.0
Tax adjustments relating to prior years
Corporation tax 0.4 (1.1)
Deferred tax (0.4) (0.1)
--------------------------------------------------- ----- ---------------
Total tax expense in income statement 12.3 16.9
--------------------------------------------------- ----- ---------------
2019 2018
----------- -----------
% GBPm % GBPm
------------------------------------------- ---- ----- ---- -----
Profit before tax 104.7 127.5
------------------------------------------- ---- ----- ---- -----
Tax expense at UK corporation tax rate 19.0 19.9 19.0 24.2
Effects of:
- Expenses not deductible for tax purposes 1.0 0.7
- Higher rates of tax on overseas earnings 0.8 1.4
- UK research and development tax credits
and other allowances (0.5) (0.5)
- Tax adjustments relating to prior years - (1.2)
- Difference in rates between deferred tax
and corporation tax (1.3) 0.3
- Patent box deduction (7.6) (8.0)
------------------------------------------- ---- ----- ---- -----
Effective tax rate and total tax expense 11.7 12.3 13.3 16.9
------------------------------------------- ---- ----- ---- -----
5. Earnings per share
Year ended Year ended
30 September 2019 30 September
2018
--------------------------------------- ------------------- --------------
Earnings
per share - basic 107.2p 128.8p
- diluted 106.9p 128.2p
------------ ------------------- --------------
Profit for the financial period
(GBPm) 92.4 110.6
--------------------------------------- ------------------- --------------
Weighted average number
of shares used - basic 86,140,877 85,857,265
- diluted 86,418,120 86,299,646
-------------------------- ----------- ------------------- --------------
6. Financial assets held at fair value through profit and loss
Surface Generation Limited
On 22 December 2018, the Group acquired a minority equity
interest of 16% in UK-based Surface Generation Limited ('Surface
Generation'), for a cash consideration of GBP3.5 million.
This strategic investment is in line with the Group's Polymer
and Parts Strategy and sees Victrex forming a partnership with
Surface Generation utilising potentially state of the art
manufacturing processes, which will support Victrex's mega
programmes. The PtFS (Production to Functional Specification)
technology Surface Generation has offers the potential for enhanced
manufacturing effectiveness beyond standard moulding technology,
including driving reductions in energy consumption and cycle times
required to process the most complex material and part
combinations.
Bond 3D High Performance Technology BV
On 22 December 2018, the Group invested an initial EUR2.720
million via a convertible loan in Bond 3D High Performance
Technology BV ('Bond').
Bond is a company incorporated in the Netherlands, developing
unique, protectable 3D printing (Additive Manufacturing) processes
which are capable of producing high strength parts from existing
grades of PEEK and PAEK polymers. The investment offers the
potential of utilising this technology to help accelerate the
market adoption of 3D printed PEEK parts, with particular emphasis
on the Medical market.
Following successful completion of technical milestones, the
Group made a further convertible loan of EUR1.175 million on 1
April 2019. On 24 May 2019 it was agreed that technical validation
had been achieved and therefore these loans were converted into
equity, along with a further investment of EUR5.5 million. This
resulted in the Group's shareholding being 17.2% at 30 September
2019.
Additional investment is anticipated over the subsequent two
years totalling EUR7.3 million based on a number of performance
conditions and milestones being met. Considering all relevant
factors, significant influence has been determined to be held from
24 May 2019 and as such has been accounted for as an associate from
this date.
7. Derivative financial instruments
The notional contract amount, carrying amount and fair value of
the Group's forward exchange contracts are as follows:
As at 30 September As at 30 September
2019 2018
--------------------- ------------------- ----------------------------------
Notional Carrying Notional Carrying
contract amount contract amount
amount and fair amount and fair
value value
GBPm GBPm GBPm GBPm
--------------------- ------------------- ---------- ---------- ----------
Current assets 22.3 1.5 39.0 1.1
Current liabilities 165.7 (9.3) 180.5 (6.2)
---------------------- ------------------- ---------- ---------- ----------
188.0 (7.8) 219.5 (5.1)
--------------------- ------------------- ---------- ---------- ----------
The fair values have been calculated by applying (where
relevant), for equivalent maturity profiles, the rate at which
forward currency contracts with the same principal amounts could be
acquired at the balance sheet date. These are categorised as Level
2 within the fair value hierarchy under IFRS 7.
In addition to the above, GBP3.3m is included in current
liabilities in respect of the fair value of the derivative
instruments associated with TxV. These are categorised as Level 2
within the fair value hierarchy under IFRS 7.
8. Exchange Rates
The most significant Sterling exchange rates used in the
financial statements under the Group's accounting policies are:
2019 2018
---------------- ----------------
Average Closing Average Closing
spot
---------- ------- ------- ------- -------
US Dollar 1.29 1.22 1.30 1.30
Euro 1.13 1.11 1.13 1.11
Yen 143 133 144 149
---------- ------- ------- ------- -------
The average exchange rates in the above table for the year ended
30 September 2019 are the weighted average spot rates applied to
foreign currency transactions, excluding the impact of foreign
currency contracts. Following adoption of IFRS 9 on 1 October 2018,
any gains and losses on foreign currency contracts, where net
hedging has been applied for cash flow hedges, have been separately
disclosed in the income statement as required. For the prior
period, the average exchange rates in the above table take into
account the impact of gains and losses on foreign currency
contracts.
9. Dividend and Annual General Meeting
The proposed final regular dividend will be paid on 21 February
2020 to all shareholders on the register on 31 January 2020. The
Annual General Meeting of the Company will be held at 11am on 6
February 2020, at J.P. Morgan, 1 John Carpenter Street, London,
EC4Y 0JP.
10. Risks, trends, factors and uncertainties
Victrex's business and share price may be affected by a number
of risks, trends, factors and uncertainties, not all of which are
in our control.
Accordingly, actual results may differ materially from
anticipated results because of a variety of risk factors,
including: changes in exchange rates; changes in global, political,
economic, business, competitive and market forces; changes in raw
material pricing and availability; changes to legislation and tax
rates; future business combinations or disposals; relations with
customers and customer credit risk; events affecting international
security, including global health issues and terrorism; changes in
regulatory environment and the outcome of litigation.
FINANCIAL CALENDAR (also available at www.victrexplc.com)
Ex-dividend date 30 January 2020
Record date# 31 January 2020
-----------------
Annual General Meeting 6 February 2020
-----------------
Payment of final dividend 21 February 2020
-----------------
Announcement of 2020 half-yearly May 2020
results
-----------------
Payment of interim dividend July 2020
-----------------
# The date by which shareholders must be recorded on the share
register to receive the dividend
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR DGBDDIDGBGCS
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