G'day, ladies and gentlemen, and welcome to the Victrex Interim Results Meeting, May 2024. 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 that this call is being recorded. I will now hand over to the CEO of Victrex, Jakob Sigurdsson, to open the presentation. Please go ahead.
Yes, thank you, sir. Good morning and welcome to Victrex's half-year results presentation, 2024. First, some introductions. I'm Jakob Sigurdsson, CEO of Victrex. We also have Ian Melling, our CFO, here, and Andrew Hanson, our IR Director. This is an audio call only today, so all questions at the end will be via the phone. Ever so briefly, some housekeeping: the slide presentation is on our website, www.victrexplc.com, under the Investors tab and by clicking on Reports and Presentations. We will call out the slide numbers as we're going through the presentation today. I will kick off the presentation with our key messages and a summary of the results, and Ian will then cover the financial details. I will summarize towards the end the business performance and our outlook, and we'll finish with Q&A towards the end.
So if we move to slide 3 in the presentation pack, firstly, if we take a step back, it's worth reflecting that despite some of the toughest time seen in the chemical industry for many years, we have stayed the course as it relates to the execution of our strategy and corresponding investments in both assets and capabilities to underpin and support our future growth. Despite the short-term challenges we and companies in the sectors have faced, we adapted elements of our strategy, but the fundamentals remain strong and we're well positioned for future growth. As a consequence, and noting that we are seeing tangible signs of improvement in several end markets, we are very well placed for the uptick, and we remain confident in the mid-term growth targets that we set out last year.
Taking each in turn, firstly, we are seeing, as I said, some recent signs of end market improvements, which makes us focused on growth in volume and revenue and PBT in the second half. So a core business which is robust and ready to see some upside from market recoveries and some pent-up demand in certain sectors post-COVID. Secondly, we have, as I said before, also stayed the course on our mega programs. We have prioritized our investments such that we have five distinct mega programs, each delivering milestones towards greater commercialization. Quick examples are the opportunity of a commercial PEEK Knee in the market within the next couple of years, all the good progress being made on e-mobility as an example. Thirdly, we're coming out of this demand downturn with a robust balance sheet.
Our investment phase is concluding, giving us well-invested assets, capacity, and capability for several years to underpin our growth programs. This is important to ensure that we will not cause delay in new product launches and adoption and providing confidence to our customers that we can deliver needed volumes in a reliable way. We will now see CapEx reducing and inventory unwinding, which together with demand improving supports better cash flow, which obviously enables us to invest and support shareholder returns. Finally, our growth opportunities have not gone away. The mid-term prospects for Victrex remain very strong, supported by a broader range of application using PEEK as well as tangible progress on the mega programs as we move towards commercial inflection. I also want to add that our capability and culture is very strong at Victrex.
We were recently recognized in The Sunday Times Best Places to Work for 2024, basically a testimony to our strong engagement score, a real confirmation to our people and our culture. So a solid investment case coming out of a very tough period, but one that will support us over years ahead. Now, if we move over to page 4 on some of the highlights, the first half was in line with our guidance. Remember, we saw our first quarter of 751 tons, and we also had the impact of much weaker medical. Half-year volumes are 11% down on what was a solid half-one last year. I think the encouraging news is that we saw a strong sequential improvement in Q2 with volumes up 31% versus Q1 and also broadly flat versus Q2 last year. End market improvement is more encouraging right now.
It's pleasing to see aerospace and automotive starting the year well, with some more positive signs also coming out of our value-added resellers segments. VARs, our value-added resellers, were up 44% in Q2 versus Q1 and 2% up in Q2 versus Q2 last year. The challenge in the first half has been destocking situation in medical, with all of the large medical device companies showing high or record inventory levels late last year and now working them downwards as we speak. Good news there is that growth in surgical procedures remains strong, so the opportunities in medical for us remain very strong. We look forward to seeing some improvement in medical, but destocking may linger in this end market, at least in the first month of the second half-year.
Lower asset utilization has also been a challenge for us in this period and will remain so through FY24 and into FY25 as we unwind inventory, and Ian will cover that in detail in his summary shortly. Finally, in our mega program, we continue to deliver strong milestones with e-mobility, trauma, and knee, particularly in focus during the period, and I will touch on these specifically a little bit later in the presentation. So in summary, our first half, which was in line with guidance, we are seeing tangible signs of improvement at the end of the first half and heading into the second half. PBT is lower on the impact of medical destocking and asset utilization, but run rates at the end of the first half supporting the opportunity for volume, revenue, and PBT growth in the second half and offering prospects for good growth in FY2025.
I will now hand it over to Ian for the financial details.
Thank you, Jakob. Good morning, everyone. Before turning to the income statement, I'd like to briefly reinforce the key messages which Jakob covered. The first half was in line with our guidance, with the sequential improvement in Q2 despite being a softer period. The improving run rates and Sustainable Solutions and the medical improvement would support the opportunity for H2 growth in volume, revenue, and PBT compared to the second half of 2023 and, of course, the first half of 2024. While our guidance remains for full-year PBT to be somewhat lower than 2023, if these run rates continue and based on some macro improvement, this gives encouragement on prospects into FY 2025 and validates our medium-term growth targets. Moving to slide 6 in the income statement, we reported half-year revenue of GBP 139.3 million, down 14% on the prior year or 10% in constant currency.
Sales volume was down 11% at 1,737 tons, with Q1 down 22% and Q2 broadly flat. Despite medical being weaker, average selling prices at GBP 80 per kilogram were in line with guidance, and I'll come back to this on the later slide. Summaries of our divisional income statements are shown in the appendix on slide 29. Jakob will summarize the performance by end market later in the presentation, but it's worth noting that the end market seeing the most impact during the period were electronics, energy industrial, and value-added resellers. VAR did see volumes improve in Q2 of 44% versus Q1 and by 2% versus the prior year, so some more encouraging indicators at the end of the period, and we have seen a solid start to H2. Moving on to gross profit of GBP 66.8 million, which was 23% lower than the prior year.
This is after the effect of a gain on currency contracts of GBP 2.5 million, underlying the value of our hedging strategy. We expect a small tailwind from currency for the year at PBT level despite a headwind at spot rates. The declining gross profit was driven by weaker trading, including the impact of medical destocking. The two other key drivers on gross profit were the under-recovery of fixed costs through lower asset utilization as we unwind inventory. The impact of this is shown on the next slide and equated to approximately GBP 6 million in the first half versus FY23, and the impact in H123 of selling finished goods from inventory that was manufactured in FY22 when production volumes were much higher and before cost inflation peaked. I will cover these items on the PBT bridge shortly.
We did start to see some benefit from certain raw material prices coming off, and this will further come through in future periods. But as a consequence of gross profit being impacted by sales mix and lower asset utilization, we saw gross margin below our expectations at 48%. With softer demand, particularly in Q1, production levels were lower than our forecast, with polymer production levels for the year now set to be 800-1,000 tons lower than FY23. Our assumption in the second half is for gross margin to be similar to H1, with any potential upside being driven by demand improvement flowing through to production levels and/or medical headwinds easing. Turning to overheads, we're pleased to demonstrate strong cost control here. Overheads were 13% lower than the prior year or 8% lower in constant currency.
This reflected tight cost control in a number of areas: travel, recruitment, and headcount, and discretionary spend despite an inflationary pay award for all our employees and continuing to invest in our mega programs. This number also reflects lower accrual for bonus and reward schemes. We expect to see a continuation of the lower OpEx trend in the second half, with OpEx trending high single-digit down for the year as a whole. As we've signaled previously, after a period of high investment, we do expect to see increases in OpEx being much more modest going forward.
Moving from operating profit to PBT, a reminder that with interest now being expensed rather than capitalized on our China loan from the second half of 2024, a lower cash balance at the end of FY23, and utilization of our RCF, we will see a higher interest expense in FY24, with the first half showing a net GBP 0.4 million expense and an expected approximately GBP 2 million net interest expense for the full year. Underlying PBT of GBP 28 million was down 34%, 40% in constant currency, compared with the solid period in H123, which included a record performance in medical and better asset utilization. Reported PBT was materially lower at GBP 3.3 million, which reflects exceptional items of GBP 24.7 million, primarily relating to an impairment on our Bond3D investments of GBP 20.1 million.
This is a non-cash item, plus the ongoing implementation of our ERP system, as signaled previously, accounting rules meaning we have to treat this as an expense rather than it being capitalized. With regard to Bond3D, while we have seen progress, the financial investment required has not been raised, and the market for raising new capital remains subdued, particularly in the additive manufacturing arena, resulting in a triggering event for an impairment. The non-cash impairment of GBP 20.1 million comprises writing off the associated investment and loans to Bond3D in full. Finally, underlying EPS of 27p was down 36%. It's also worth flagging here that our effective tax rate of 24.5% was much higher than last year's full-year rate of 15.8%. The higher tax rate was impacted by the impairment of the investment in associate Bond3D, which is in part non-tax deductible. It increased the rate by 5.2% alone.
Other factors include the increase in UK corporation tax rate and a lower proportion of profits being eligible for the Patent Box rate of 10%. While the reduced rate on profits taxed under the UK government's Patent Box scheme remains available to Victrex, the proportion of profits which benefit from the lower rate reduces at lower profit levels and vice versa. This explains why a lower level of profits shows a higher effective tax rate. Going forward, our guidance remains for an effective tax rate in the medium term of 13%-17%, subject to changes in tax legislation. On dividend, the Board has proposed an interim dividend of GBP 13.42 per share in line with the prior year. This aligns with indicators of some recent end market improvement and a focus on a better second half and a return to stronger cash generation.
A slide on our capital allocation policy is shown in the appendix. We do expect to see improved cash flow from here as investment moderates, inventory unwinds, and trading improves. This supports the opportunity for shareholder return. On slide 7, we show the underlying year-on-year PBT movements. The main drivers on profitability were threefold. Firstly, softer trading, as we have covered, principally medical destocking due to higher inventory levels across that industry, medical equating to a GBP 3.8 million impact on profitability versus a record first half in 2023. Secondly, the cost impact from inventory. This was the year-on-year effect of finished goods manufactured in FY22 at a lower cost and sold in H123 versus the impact of selling inventory this half year from those manufactured in FY23 at a higher cost.
This impacted profitability by GBP 7.7 million and is primarily a first half effect, and lower asset utilization with the under-recovery of fixed costs in polymer production and our downstream assets due to volume output impacting us by GBP 5.9 million. On fixed cost recovery, we are guiding to a similar impact in the second half, so approximately GBP 12 million impact for the year as a whole. I've already noted that production will be 800-1,000 tons lower than the prior year. Remember that we overproduced versus sales volume last year as we built inventory to support our UK asset improvement program, which is now substantially complete and in anticipation of a recovery during the second half, which did not come. Growth investment was primarily supporting our medical acceleration program for trauma and knee, including our Leeds Development Centre.
On overheads, as I covered on the last slide, we kept tight cost discipline with overheads GBP 2.9 million lower, reward schemes saw a GBP 1.1 million benefit with interest costs GBP 1 million adverse, and a currency tailwind after hedging of GBP 2.2 million being the balance of the movements. Moving on to slide 8, price and margin. Our half-year average selling price was in line with our guidance at GBP 80 per kilogram, some 4% lower than last year, driven principally by foreign exchange. Like-for-like price was a modest positive in the period, offset by adverse mix with a lower proportion of medical sales. H123 ASP in constant currency, FY24 rates was also GBP 80 per kilogram. While we don't report divisional ASPs, we see underlying pricing as robust in both our sustainable solutions and medical areas.
Mix was slightly more favorable within sustainable solutions during the half this year as we have seen less VARs and more aerospace. Guidance for the year as a whole is around GBP 80 per kilogram at current FX, with any upside requiring an easing of medical headwinds. Turning to gross margin, gross margin of 48% was 550 basis points down on H123. This principally reflects lower asset utilization and under-recovery of fixed costs and the impact of lower cost of inventory sold in the comparative period, as noted previously. On slide 9, we show the gross margin movements in detail. Gross margin in H123 benefited from a strong sales mix as medical delivered record sales.
Under-recovery of fixed costs last year was relatively low, GBP 3 million for the year as a whole as we overproduced versus sales volume, building inventory to support our asset improvement program and in anticipation of some recovery in the macro environment. This year, we can see that the mix affecting sustainable solutions was supporting gross margin, with medical having the opposite effect. The key drivers on gross margin are therefore lower asset utilization, impacting gross margin by 410 basis points, and the impact of selling lower cost inventory in the prior year being 530 basis points. This inventory was produced at higher volume and pre the cost inflation peak in FY22. For the full year and as we continue to unwind inventory, we see gross margin remaining similar at around 48%, with any upside relying on medical.
On the right-hand side of the chart, we see the key drivers on gross margin looking forward. We do remain confident in our goal of mid- to high-50s gross margin in the medium term, driven by improving asset utilization after inventory normalization and with improving trading, including in medical. Touching briefly on inventory on slide 10, our target by the end of FY25 is around GBP 100 million, and we anticipate getting to GBP 115 million-GBP 120 million by the end of FY24. As we have said before, strategically, it will be important to hold slightly more inventory than we did historically to ensure we are prepared for growth, to meet the needs of our customers, as well as reflecting that we are much broader business than five years ago with a broader asset and product portfolio.
With inventory continuing to unwind in FY25, the impact of lower asset utilization will continue into next year, although as noted in our outlook, the impact should be slightly lower than FY24. As a brief recap on the evolution of inventory over the past years, starting with the COVID period, we saw demand drop and a drop in production levels to below 3,000 tons alongside not being able to replenish raw materials. This period saw under-absorption of approximately GBP 13 million. Coming out of that period, as supply chains opened up, we saw record volumes in FY22 and record production levels of around 4,600 tons, so a period of high asset utilization and lower inventory cost per unit. We did need to rebuild raw material inventory from late FY22 post-COVID, as well as starting to build inventory in anticipation of our UK asset improvement program and asset shutdowns.
Inventory then became higher than we anticipated due to a weakening in H223 and also the impact of energy and raw material inflation built into inventory. Consequently, with the UK asset improvement complete, we will see a period of production being lower than sales volume until we reach inventory of around GBP 100 million. We will continue to look at opportunities to optimize inventory while being mindful of our key position in multiple supply chains and our reputation for customer service. On Slide 11, we cover currency. Currency hedging is reflected on the face of the P&L in line with IFRS 9. Note that the offsetting currency impacts on underlying trading are embedded in the other lines, most significantly revenue.
Overall, we saw a GBP 2.2 million tailwind at PBT level in the first half, with less of a tailwind expected in H2 to give a benefit in the year of around GBP 3 million. This was caused largely by the impact of the weakening of sterling in the early part of the prior year before it recovered through 2023. And remember, this is after the effect of hedging. Spot rates would give a headwind at PBT. The gain on forward contracts was GBP 2.5 million compared to a GBP 6.2 million loss in H123. We hedged the dollar and the euro, though it's worth noting some unhedged Asian currencies are growing in importance as our growth moves faster in those regions. We keep our hedging policies under review in respect of these currencies.
On slide 12, on cash, with investment moderating, CapEx coming down and inventory unwind, we are expecting good cash flow improvement moving forward. On working capital first, we saw a negligible movement with an inflow of GBP 0.2 million as higher receivables and lower payables offset inventory unwind. If we look at the operating cash flow of GBP 18.2 million, this was GBP 20 million better than the prior year, primarily reflecting the working capital outflow last year as we built inventory. Operating cash conversion was therefore 64% compared to -4.2% in the prior year, and we would expect to see operating cash conversion continue to improve. Free cash flow of GBP 8.8 million compared to the prior year of -0.6 million and was after cash tax payments of GBP 3.4 million and interest paid of GBP 0.4 million, with cash exceptional items of GBP 4.1 million being marginally higher than the prior year.
Remember, our ERP system will be going live in Q1 FY25, and therefore we expect the exceptional cost to be substantially complete this year. Dividends paid of GBP 40.1 million reflect the final FY23 dividend paid in February 2024. We have utilized our banking facilities during this period with a GBP 26 million drawdown of the RCF, a balance which has reduced since the half year. This results in an H124 net debt position of GBP 49.8 million, including cash and cash equivalents of GBP 28.5 million. Finally, as a quick recap, we did renew our UK banking facilities last year, increasing the level of facilities to GBP 60 million, GBP 40 million committed, and GBP 20 million accordion. The facility expires in October 2026. A quick word on China shown on slide 13. We're pleased to say that the facility has been commissioned, including first PEEK batches prior to commercial production start-up in the second half.
To recap, the facility is an important strategic move. It broadens our portfolio of PEEK grades, and it underpins our growth opportunities in China, particularly in auto, electronics, and VARs. We're not expecting a significant volume in FY24, and it will be under-utilized for a period of time, but we do expect to see the facility ramp up over the coming years, and Jakob has spoken of the potential to fill the facility by the end of the decade. We will see some incremental costs from start-up, including depreciation, taking total depreciation and amortization to around GBP 25 million on an annualized basis. Remember also, some of the people costs will move from SG&A and capital cost to COGS as the facility starts up. This concludes what has been a major investment phase since 2020: investment in assets, investment in people, and investment in capability.
This will position us well for the upturn, and overall CapEx will nudge down to around 8%-10% of revenue, with FY24 CapEx set to be more modest in the second half, so GBP 30 million-GBP 35 million for the year. Moving on to slide 14, my final slide, I'd like to make a few points around the guidance. As we state clearly in our outlook statement today, moving into the second half, we're expecting a better second half versus the first half of 2024 and also a better H2 versus H2 2023. This is based on our assumptions that sustainable solutions run rates continue to improve and on an improvement in medical revenues. On PBT, we do see the opportunity for H2 2024 being slightly better than H2 2023 in line with our outlook comment.
So on a full-year basis, current run rates support the opportunity for full-year volumes to be low to mid-single digits higher than the prior year. Consequently, and as previously communicated, we are not expecting PBT progress for the year, even if we do see a slightly better second half. On some of the line items, the slide here shows that on COGS we will have some benefit from lower raw materials, but this will be offset by China start-up costs and the impact of lower asset utilization, as we've covered. On OPEX, strong cost discipline continuing into H2, and on cash flow, I've signaled the various elements supporting continued improved cash flow into the second half. Thank you. And with that, I'll hand back to Jakob.
Thanks, Ian. Just before we move forward, I've been alerted of the fact that there will be a fire alarm in the office here in a few minutes. So whilst that passes, we'll shut off the microphone, but don't leave the call. No reason for doing that. Anyway, thanks, Ian. So if we move on to Slide 16 now, where we cover business performance, firstly for sustainable solutions, we are pleased to see both aerospace and automotive performing very well so far and some tangible signs of recovery in the other segments. On automotive, volumes are up 14% in the half, supported by some restocking. But we're also seeing good growth in the core business, and we're moving into new applications.
If we look at the latest S&P data on auto, production levels for 2024 are expected to be around 90 million cars, 90 million passenger cars, still very short of the 96 million cars produced in 2018. This level is not forecasted to be reached again until 2028, so there is still plenty of demand to come. And combined, as I said before, with our growth into new applications, we'd expect tougher comparatives in the second half for auto, but we still remain neutral to optimistic on auto for the full year. A brief word on EVs. Our e-mobility program has a broader range of customers now, and application areas continue to offer us growth opportunities. We talked about wire coating using PEEK as a big area for us.
We're expecting to see this continuing to progress with the opportunity to get to a revenue greater than GBP 10 million next year. On aerospace, great progress as well. Volumes up 18% in the half. We remain optimistic for good growth going into the second half as well. This year, we've also seen a contribution from business into COMAC in China with around 300 kg of PEEK on their C919 plane, and we expect this to be progressing over the years ahead. I do want to remind everyone that our LMPAEK, or Low-Melt PEEK Polymer, is now viewed as the industry benchmark for composites with major OEMs. I will cover aerospace composites opportunity in a couple of slides in more detail as well.
On energy and industrial, PMIs, which are a good barometer of business conditions in those segments, have now turned more favorable in recent months, though improvement may be a bit patchy. U.S. PMIs are now hovering around 50, actually just below 50 in April, with China taking up to 51. Energy is around one-third of our volumes in this segment. Two-thirds is driven by manufacturing and engineering equipment, so industrial applications. And we're seeing some tangible signs of improvements and recovery in the industrial sector as we speak, and they tend to be quite correlated with signs and performance in value-added resellers, actually. Volumes were down 15% in the half but up over 50% in Q2 on Q1, so good signs of recovery in the second quarter, and we're seeing that continue into the third one as well.
Electronics volumes down 35% in the first half but 39% in Q2 on Q1, 39% up Q2 on Q1, so some encouraging signs of improvement there as well. It's been well publicized as it relates to the challenges in the semiconductor industry over the past year, but we know that the latest WSTS data forecasting a 13% growth in semiconductors during 2024, and we're starting to see some tangible signs of that in our numbers. So moving on, our smartphones, again, well-publicized challenges as we've seen in semiconductor. There, through the calendar Q4 of 2023, showed year-on-year smartphone growth turning positive from there. And on value-added resellers, a really strong sequential improvement of 44% in volumes between Q2 and Q1 this year. VARs is an area that aligns to most of our end markets, while visibility remains low.
We do know that VARs typically see the first signs of demand improvement, and we'll continue to track progress in this area, but it is pretty much in line with our hypothesis as it relates to how and when recovery would return. We've also seen a solid start to the second half in VARs as well. Finally, we referred to this in the announcement and do want to flag our interest remains very strong in application development focused on how PEEK can be used in multiple industries and new applications. Our core business application pipeline has ticked up 20% compared to the first half of last year with our mature annualized revenues of over GBP 360 million, so a healthy core business pipeline. In summary, we continue to find new application spaces for the use of PEEK across a broad range of industries.
These are small applications in many different industries but constitute a very solid core combined with the mega programmes that frequently get the much greater attention. Now, if we move to slide 17 on medical update, this remains a very strong end market opportunity for Victrex. As a recap on our medium and long-term goals, we said last year we wanted to double our medical revenues from FY23 in five years' time. We're also aiming at making medical becoming a bigger contributor to group revenues overall, and we set ourselves a target for that being over 30% by 2032. This is a very achievable objective despite some of the impact from medical destocking in the first half, though we did see good sequential improvement in Q with revenues up 16% compared to Q1 this year.
Reading some of the recent earnings summaries from large medical device companies, it's clear that they built up very high inventory levels post-COVID and are now actively reducing those and have, in fact, been doing so since mid to late last year. I think the good news is that growth in surgeries and procedures remains positive, which bodes well for us once the phase of inventory correction has run its course. Finally, in areas like CMF, cranial maxillofacial skull plates, these have bespoke applications, so good growth there with 5% growth on the half year in this application area. On slide 18 on the mega programs, you can see the chart with tracks or milestones in each of our mega programs. I'm not going to go through everyone, but we do continue to make very good progress in each of the milestones as commercialization builds.
In the next 12 months, we expect to see a number of key commercial milestones coming through as well. For this year, we also expect to show Magma programme revenue growth versus FY23, with FY25 expected to be more of an inflection year supporting our growth targets. Good progress overall, particularly in trauma, where plate deliveries are growing in e-mobility with a broader customer base and continued progress in aerospace composites with qualifications for PEEK composites using our industry benchmark LMPAEK polymer on larger parts coming through this year. This will also be supported by running changes and also qualification for next generation of platforms. Magma, I was with the executive team at TechnipFMC very recently, and we were also hosted Petrobras recently as the qualification and commercial negotiation continue.
But further news on any commercial arrangement between the two obviously is subject to news flow from their side, but not ours. But we remain very confident in the prospects for the flexible pipe and the Magma technology. Finally, on knee, really strong progress and strong interest now from other top knee from other top five knee players making commercial PEEK Knee a real prospect over the next 1-2 years. And we're working towards the first regulatory approval before the regulatory submission and approval in the next 18 months, and actually the submission before the end of the calendar year. Slide 19 on trauma. Remember that Victrex has developed a manufacturing know-how for PEEK composite-based trauma plates, and these are now commercialized in the market. The benefits of PEEK-based composite trauma plates are clear.
We are seeing enhanced union rates with the modulus of PEEK being similar to bone, the opportunity to have an alternative solution to metal for those individuals with metal intolerance, and the ability to see the device through an X-ray and how it is supporting patient healing. So Victrex manufactures a plate alongside some outsourced manufacturing with strong IP here and a differentiated solution. Good progress so far with over 5,000 plates supplied since regulatory approval last year and 2,000 plates so far this year. We're expecting revenue progress this year, but the inflection point is more focused on FY25 as we see additional customer launches and a broader customer base in the US and Asia supporting growth. Moving to slide 20 on Knee, really strong progress here. I've said previously this could be a game changer for Victrex, and nothing has changed that in our minds. Really tangible progress.
Firstly, on the clinical trial, we now have 54 patient implants, and 12 of them post the two-year clinical stage with no intervention. Secondly, as a consequence, we are targeting regulatory submission in 2024, which will be in India, one of the trial sites, subject to approval. This offers the opportunity of having a commercial PEEK Knee in the market in calendar year 2025 or early 2026. This means that we are pivoting from being solely at the development stage and turning to how we can drive the launch and commercialization stage. Our partnerships now are with Maxx Orthopedics and Aesculap, which is a part of B. Braun, the fifth largest Knee player globally.
We will keep the market updated on progress here, but it's worth noting the customer pool has significantly increased over the past year, and consequently, we have interest from all the top five players as well. So really encouraging progress. On slide 21, aerospace composites, I want to quickly show how the progress on aerospace composites is progressing, and particularly the image of the fuselage demonstrator based on an Airbus A320, very powerful image. Remember that aerospace composites are the opportunity for growing our share of the aerospace market or our share of materials on a plane by 10x going forward. Whilst these might be viewed as futuristic opportunities, it's worth noting that we're working with all of the major OEMs as well as tier companies on running changes as well.
So composite parts on existing platforms or retrofit opportunities with applications in engine housings and in other areas as well. Our aerospace composite opportunities are driven by our Low-Melt PEEK platform, LMPAEK, which really helps and assists with faster processing and better consolidation and has a unique value proposition. One example is shown on our website, is actually with Airbus helicopters, where there's a significant opportunity to reduce both costs and weight. And moving back to the image on this particular slide, it shows the fuselage that has been constructed as a part of the Clean Sky program and the multifunctional fuselage demonstrator part effectively is an 8-meter section from an Airbus A320 that we're looking at here, 8 meters in length, 4 meters in diameter. The stringers made using LMPAEK from Victrex, the structures using Victrex LMPAEK as well, as is the whole fuselage skin. So really good progress.
This demonstrator, as I said, is a part of the qualification work with Airbus for new platforms with similar opportunities for other OEMs. Slide 22 on ESG, we recently completed a review with SBTi, the Science Based Target Initiative, and are expecting to have final review of our decarbonization targets very shortly. We already have good ESG credentials through our three pillars, people, an extensive STEM program and work with local communities, planet of focus on decarbonization of our assets as well as how we can support circularity and recycling in the supply chain and products with our products helping support CO2 reduction through lightweighting and faster processing in a number of industries as well as clinical benefits in medical. On slide 23, touching a little bit on the outlook by end market with the latest indicators for the second half of FY24, we are optimistic on aerospace.
Build rates remain strong and with some upside from certain platforms, particularly associated with the A350, where we've got around half a ton of PEEK per plane. On value-added resellers, I noted that we've seen a 44% growth in Q2 on Q1. Whilst visibility does remain low, our relationship with the major of our customers does remain strong. As demand starts to improve and with more favorable comparatives in the second half, we're expecting to see growth in VAR, one of the best indicators of a broader demand recovery as well in other industries. On electronics and automotive, we are neutral to optimistic. Market indicators in semicon are positive for the rest of 2024, with semicon being around half of our business in this area. Auto, very good progress in the first half with some benefits from restocking as well.
Our position here acknowledges that S&P data shows a broadly flat position for car build in 2024, though with good growth in the first half, we'd certainly be looking at growth for the year as a whole in auto, also driven by, as I said before, our penetration into new applications. Energy and industrial neutral, as I covered earlier, some PMI improvement and rig count up globally by around 5%. It's interesting to note, as I said earlier on, that recovery in VARs tends to precede recoveries in energy, and in particular on the industrial side. So the recovery that we've seen in VARs gives us a reason to be optimistic about industrial and manufacturing as well. I think we're starting to see the early signs of that. On medical, the key driver here will be the duration of the destocking cycle.
It will pass, but I think recent reporting from some of the larger medical device companies would suggest that it might stay soft for at least this quarter. But good news is procedural growth is strong, and our midterm opportunities are really good with a broader range of applications. On slide 24, as a summary and wrapping up, we are seeing tangible signs of end market improvement. I've referenced the significant Q2 improvement on Q1 and the continued momentum into Q3. On the full year, as Ian also noted, we're focused on a better second half with growth in volume, revenue, and PBT in H2 versus H2 2023. Cost, we've shown strong cost discipline, and we do have some further opportunities here. Looking beyond FY24, our mega programme milestones are on plan.
FY25 will be a key inflection point here or inflection year here with demand recovery, lower CapEx, inventory unwinding. We will see better cash flow over the coming quarters, and this will enable us to invest as well as reporting shareholder returns. So a lot of strength in our investment case as we come out of a very tough period for Victrex and for chemicals. We've invested in assets, in people, and capabilities, and we've stayed the course, ready to capture the opportunities as we see trading conditions improve. In summary, still some headwinds, but the recovery has definitely started. Inventory correction has taken place on the industrial side. Shape of the recovery is a bit unknown, and there might be some volatility around that, but the momentum and the tide have certainly changed towards the positive, even if reducing in the immediate to short term.
But we are confident in the medium to long term and look forward to reporting on this over the coming periods. That concludes our formal presentation today, and we'll now open it up to Q&A.
Thank you. And if you are dialed into the call and would like to ask a question, please signal by pressing star one to raise your hand and join the queue. If you are listening to the call via loudspeaker and are called upon to ask your question, please ensure you pick up your handset and unmute your device. Again, that is star one to join the queue, and your first question comes from the line of Sam Perry from UBS. Please go ahead.
Thanks for the presentation. I've got three questions, please. So firstly, you've maintained the midterm guidance at 5%-7% revenue CAGR. Just wondering how your confidence in achieving that has changed since you announced it at the end of last year because 2024 is clearly going to be worse than you initially expected, and you're also talking about lower asset utilization continuing into 2025. Second question, we've seen some of your competing materials come down in price quite a lot over the past year, PVDF probably most notably. Do you think you've lost much or any business as a function of this? And then lastly, can you talk a bit about how important it is to your customers to maintain low net debt levels?
Just thinking about this from a capital allocation perspective, because in the release, you also say you've maintained the interim dividend, which reflects some signs of end market improvement. Does that mean if you don't continue to see this improvement, there's a risk that you don't hold the full-year dividend? I guess in short, my question is, if demand doesn't improve in line with your expectations, do you prioritize the balance sheet or dividends? Thanks.
Yeah, thanks, Sam. Good questions, all of them. As it relates to the confidence in the 5%-7% growth prospects, we are absolutely of the opinion that that is the growth potential within the core business. And as you may remember, when we layered the entry of the contributions from the mega programs on the top of that, that would take us up to the 8%-10% range over the five-year period. And it is interesting if you do sort of the technical analysis of how our business has fluctuated in recent times, you would understand why we would still be confident in the 5%-7% growth rates.
And as we head out of this, and actually we see that in the momentum in the business today, we are sort of regressing towards what could be the best fit line for the growth prospect and the growth trajectory of the business. So even in spite of these huge swings in demand that, well, not just us, but the industry has seen, the assessment that we have done based on what we have in the pipelines, based on the composition of the core business, basically leads to a position where we feel confident in the growth target that we're set out there last year. And that obviously applies to FY25 and the outlook that we've sort of given on that one as well.
As it relates to pricing in the marketplace, yeah, clearly when things are down, and maybe particularly in commodity chemicals, when demand is low, prices tend to drop quite significantly, especially the chemicals behave a little bit differently from that. So to answer your question, I don't think we've seen any migration from PEEK into other technologies. And as it relates to potential market share shifts from us or towards us from other PEEK manufacturers, I don't think we've lost anything. And had we lost anything, these might have been netted out by things that we've also seen tangible evidence of gaining in the period. So net-net, that's probably where we're at a wash. But I've not seen any migration to your specific point from our material towards any other high-performing polymers. And remember that PEEK is very often, for lack of a better description, the material of last resort.
In other words, when you're looking for a high-performing material and you've tried everything else, PEEK is quite often the material that is chosen because it can solve such a broad range of performance requirements above and beyond many other kinds of technologies. On the third one, I'll refer to Ian.
Thanks, Jakob. And thanks for the question, Sam. So yeah, our capital allocation policy, I think, is unchanged and is clearly set out in the appendix to the slide. We do take pride in having a strong balance sheet, but we have used our RCF this year, and we will use it in the future if we need to. We don't have a problem with that, but I do think we'll continue to retain a strong balance sheet. And that's what's allowed us to invest through the cycle and through this tough period that we've had in the last two or three years. So strong balance sheet's important, but we're not signaling any change in capital allocation policy today. Clearly, the full-year dividend will be a matter for the board when the time comes. But we drew the facility.
We started to repay that already, and no change in the capital allocation policy as it currently stands. Did this answer your question, Sam?
Yeah, that's great. Very clear. Thank you.
Thank you.
Your next question comes from the line. Chetan Udeshi from J.P. Morgan. Please go ahead.
Yeah, hi. Thanks for taking my questions. Maybe the first question, I was just looking at the numbers from I mean, of course, we've got very long-term numbers for Victrex. And just curious, Jakob, you mentioned the pricing in commodities can swing around whereas specialty prices remain stable. But yet, we've seen Victrex's PBT today, based on your guidance, is like 13% or 15% below what you guys did in 2010. So how should we not think about this as something structural within business rather than just cyclical? Because I guess that's been a key question I've been getting over the last three years, given the earnings disappointments that we've had in general, not to discount the difficult environment, but it just feels like for a business like Victrex, we shouldn't have seen such a, let's say, depressed earnings environment.
The second question, maybe this is for Ian, your second-half guidance still implies a pretty strong step up from first half. And can you remind us what are the key drivers of that? Because it seems your underutilization costs aren't going to be much different between first half and second half. So what will drive that PBT increase of GBP 10 million-GBP 12 million in second half versus first half? Thank you.
Yeah, I'll answer the second one first, Chetan. So in terms of our second-half guidance, I think the two drivers are I mean, the top line firstly, right? We've seen a strong recovery going from Q1 into Q2. It's a continuation of that as well as some recovery in medical in the second half. That's really the basis for the stronger second half. There may be some ins and outs on other pieces around asset utilization, but broadly, we do expect asset utilization in the second half to be stable with the first and overheads as well. So really, you're looking at that coming through on the top line in terms of the continuation of the run rates that we saw in the second quarter in the sustainable solutions business and a bit of a recovery in the medical business.
Then on the first one, Chetan, and thanks for the question. I think it's probably a couple of things. I think we've got to be careful as well that we are looking at numbers now that are the absolute trough of a cycle in terms of the swings in demand. At that same time and same point in time and over the same period, we are still investing quite a bit, both in assets and in capabilities to support future growth. We're very mindful of the fact that we don't want to sacrifice our prospects of future growth with too aggressive short-term actions, as we speak. So you're looking at two vectors that are going sort of in the opposite direction.
Our business is also quite a bit more diversified than it was back in 2010, driven by undertaking a lot of initiatives to show that PEEK can be used in a variety of different applications and working on market development towards further PEEK growth and market adoption in years to come. So that's a notable sort of stark contrast to where we were in 2010. And I would maintain that as we head into the next years, the next few years, we'll start to reap the rewards of the investment that I've been referring to and start to get to PBT sort of contributions and margins that are closer to what we saw in prior years, for sure. Now, clearly, there is increased competition as well when you compare to the situation back 15 years ago, 14 or 15 years ago.
And that obviously will have an impact on the overall sort of economics and structure within an industry, although we would maintain that that sort of situation is starting to become more stabilized and on a more stable ground than it might have been in the period since 2010 and today. So I think these two factors would be the key contributors. But as it relates to the return on the investment case, I think we've clearly articulated that we do see our path towards gross margins in the mid- to high 50s. And you're very well aware of our targets as well for return on invested capital.
Looking at the portfolio today, whether it is the core and the growth potential that is residing in the core, number one, and number two, the additional contributions that we can expect from the mega programmes with increased commercialisation would, I think, be the elements that would make you confident in the trajectory towards getting above 20% in terms of return on invested capital for the business as well. So I think that should put it into perspective, hopefully.
Thanks.
Thank you, Chetan.
Your next question comes from the line of Kevin Fogarty from Deutsche Bank. Please go ahead.
Morning, all. And thanks for taking my questions. Just if I could have two, please. Just one in terms of the sort of guidance for improved cash generation in the second half of the year. I just wondered if you could help us with a bit of a bridge there, and particularly around the inventory number. Where do you think? I know you've sort of pointed to FY25 inventory levels, but is there any sort of guide as to what there might be for kind of FY24 and perhaps the contribution you might see from working cap there? And then just a second point, just to clarify in terms of the medical outlook in the second half of the year. Clearly, I think the guidance, as you've just outlined, anticipates some improvement there in terms of medical.
I just wondered, have you started to kind of see that beyond Q2 at this point, i.e., kind of has April sort of been an improvement on the run rate for Q2, or what should we think about there in terms of medical, please?
I guess, Ian, you want to take the first one on the cash?
Sure. Yeah, thanks, Kevin. So yeah, in terms of second-half cash, we do expect to continue our improvement in terms of cash generation, really based on improving trading, firstly, and then improving trading, dropping through to the bottom line and the improved profit. And then in terms of inventory, we've said we expect the full year to be at around GBP 115 million-GBP 120 million. So that's down from about GBP 127 million at the half-year. So further steady progress on inventory reduction and also lower CapEx in the second half relative to the first half. We're going into GBP 30 million-GBP 35 million for the full year on CapEx. You'll see we're a little higher than that in the first half. And that's because of the UK asset improvement programs and the finishing off some of the investment in China.
That should start to wind down now into the second half to give us a lower CapEx number in H2.
And then on the second one, Kevin, I wish I could give you a clear answer, but in all honesty, I just can't. We're expecting inventory correction to be with us in medical, definitely for our Q3. I mean, I could say, which is a fact, that May is not looking bad. But that's one good data point. But I cannot say that June and July will be as good as well. I do think there is probably at least a quarter of correction yet to take place. So that means from April through June, I think the industry and many of the contract manufacturers that we talk with as well, as well as some of the information from the medical device companies, might lead you to believe that recovery might start in our fourth quarter, so the third calendar quarter.
But frankly, we'll have to see how the next couple of months pan out in that perspective. I think the way to look at it as well, I don't think there is any chance that it will be as long-lasting as what we've seen on the industrial side, for sure. And I think there's many evidence that will point out to the fact or point towards the fact that it's a quarter, at least, possibly two. I struggle to see it any longer than that. But that's as good a picture that I can paint for you at this point in time. So I hope you bear with me.
Great. No, thanks for the clarity. Thanks a lot, there, guys.
Thank you, Kevin.
As a reminder, if you would like to ask a question and join the queue, please press star one now on your telephone keypad. Your next question comes from the line of Jens Lindqvist from Investec. Please go ahead.
Yes, good morning, all. Just on the PEEK Knee, you mentioned anticipated reg filing in India this year. I was wondering if you can give us an expected timing for the EMA filing and perhaps an update on the timing and progress of preparations for the US trial, please. And then secondly, overall on the Magma program side, you previously provided some guidance for the timing of at least GBP 10 million of revenue by program. Just wondering if that guidance is still intact across the portfolio or if there's any program running materially ahead or behind previous commercial expectations. Thirdly, on destocking in medical, I'm just curious as to why this has affected non-spine to greater extent than spine, so if you could help me understand that, please.
Finally, just on FX, and apologies if I missed this in the presentation, but you mentioned an expected FX tailwind in the second half. Just wondering if you can give an indication of the expected impact on full-year PBT at the prevailing spot rates? Just to clarify, if this is included in your guidance for an improved performance year on year? That's all. Thank you.
Good. Thank you, Jens, for the questions. In terms of the European regulatory submission for the knee piece, we are working on that with our partners, Maxx. It will be it's their decision as much as it is ours. And we're not guiding on specific dates on that at the moment. But suffice it to say that it is in hand. It's making very good progress. Jakob updated on the patient numbers on the call. And we do continue to make good progress there, as well as preparing for the U.S. trial, which we would expect to be kicking off pretty soon here in the later part of calendar year 2024, I think. So yeah, good shape on the really good progress on the knee program overall and getting that first submission in, hopefully, with Maxx in India later this year.
In terms of, do you want to answer the second question?
Yeah, sure. On the guidance, Jens, for the mega programs getting above sort of GBP 10 million, I think we're making good progress on that. We gave out the guidance as well in December that we would expect and aim to have between GBP 25 million and GBP 35 million in revenues from our mega program portfolio in FY25. And that will be with the main contributors being from e-mobility, trauma. Magma will be starting to kick in according to those assumptions as well. And then sort of aerospace would be the key contributor also, but the major ones being e-mobility, trauma, and Magma. Now, knee, we're not counting on any revenues in the next couple of years for any, well, of any significant degree, really, to contribute towards that journey. But the guidance of GBP 25 million to GBP 35 million for FY25 is what we're holding to.
Then on the spine versus non-spine and FX.
Yeah, spine versus non-spine. I wouldn't read too much into this. I think we are seeing impacts of medical destocking across the portfolio. I think probably most seen in some of the orthopedic areas, which obviously does include spine, but particularly in areas like arthroscopy, some of the orthopedic players seem to be aggressively destocking, some of the big U.S. players as well. And maybe the spine strength is a little bit of our strength in spine in China. But there have also been some impacts of the VBP launches in China in the first half of this year in arthroscopy in particular. So it is a bit of a mixed bag. But I wouldn't say there's a lot to read into spine versus non-spine on the medical destocking. We are seeing it as an industry-wide issue, particularly led by the big Western players across the space.
And then on FX, for the full year, we're seeing about a GBP 3 million benefit to PBT versus the prior year. So that's a slightly smaller benefit in the second half compared to what we saw in the first half year over here.
That's very helpful. Thank you.
Thank you, Jens.
There are no further questions on the conference line. I will now hand over to the management for closing remarks.
So, well, I think everybody for attending the call today. It is clear that ourselves and the chemical industry have been going through a very tough time in the recent quarters.
But I think we're encouraged by the signs that we're now starting to see as it relates to that period having sort of run its course and that we can start to enjoy a bit more momentum as it relates to general conditions with the inventory correction being over, natural or in demand, more starting to mirror our demand, and with some good prospects as well from any potential uptick on that, as well as further contributions from our mega programs as we move into the future with a well-invested asset base, having invested well in both people and capabilities, and therefore having a very strong foundation to meet the demand for our core business and then our mega programs as they move rapidly toward commercialization. So thanks again. And I look forward to speaking to you soon.