Welcome to the Victrex half year results 2022. Throughout the call, all participants will be in listen-only mode, and afterwards, there'll be a question and answer session. Just to remind you, this conference is being recorded. Today, I am pleased to present Jakob Sigurdsson, CEO. Please begin your meeting.
Thank you. Good morning, and welcome everybody to Victrex's half year presentation for the financial year 2022. I'm Jakob Sigurdsson. Richard Armitage, our CFO, and Martin Court, our Chief Commercial Officer, are also here today, as is Andrew Hanson, our head of IR. As you may know, this is Richard's last outing as a CFO for Victrex before he leaves us at the end of this month to join Morgan Advanced Materials. I'd like to take the opportunity to thank him for the excellent contributions to Victrex and the very pleasant and constructive collaboration through his tenure with the company and wish him well in his future endeavors. We also have a number of investors that are joining us by phone as well.
Before we start, maybe first a couple of housekeeping points. The slide presentation is on our website, www.victrexplc.com, under the Investor tab and by clicking on Reports and Presentations. We will call out the slide numbers as we are speaking. Secondly, we will have a Q&A at the end, and I will open up the room first, and then we will take questions from those of you that are on the call. Turning to slide three, I thought it might be useful to summarize our purpose again, as it is what drives everything we do at Victrex. Our purpose is to bring transformational and sustainable solutions to our customers and support how they can overcome their material challenges and bring a positive impact to society and the environment.
We look to offer sustainable products and remember that we've set out a clear target to increase our sustainable products revenue to 70% by 2030 from where they are at about 50% right now. Well, firstly, environmentally, we have a clear net zero goal. We are signed up to the SBTi, and we'll be increasing disclosure of our ESG goals going forward and how we're progressing towards those. Social responsibility, safety is a key plank here. We're a zero accidents and incidents culture, and we have a great record on STEM as well, on supporting local communities, as well as building a more diverse workforce. In summary, this is how we focus our ESG goals aligned to the UN Sustainable Development Goals.
You'll be hearing more from Victrex over the months and years ahead on this aspect. Moving to slide four and the highlights, you know, for the half, well, we've seen strong demand despite the tough comparatives with the same period in FY 2021, and we're pleased to see 8% volume growth in what was a record first half if we exclude the years where we saw the consumer electronics contracts business contributing to our results. This includes double-digit growth in electronics, energy and industrial, and value-added resellers. In medical, we're pleased to see 12% growth in revenues, although some of this period we still saw an Omicron impact on surgeries, so we think there's more to go here. Profits were up 3% underlying or 10% in constant currency.
Richard will summarize the financial update shortly. It's worth noting that the growth margin, including the impact of cost inflation and currency, would have improved closer towards our target of the high 50s%, close to 60s%, thanks to better operating efficiency and the utilization of our assets. On inflation, you know, we're taking strong actions to recover inflation through price and operational improvements to offset inflation in the first half, and this initial phase is delivering on plan, even if the timing of all price increases does not benefit us through all of the first half. On our additional price recovery is well advanced for the second half, and we will update on progress later in the year. Mega programs, some further progress here, which I will summarize later on.
Before I hand it over to Richard, I would like to highlight some further progress on our ESG strategy with 100% renewable electricity from our U.K.-based sites right now and over 95% globally. Victrex has also joined Apple's Supplier Clean Energy Program, and we have established a new board committee, our corporate responsibility committee, which will have oversight of our progress here. With sustainable products supporting lightweighting and faster and more efficient manufacturing in industries like aerospace and automotive and clinical benefits in medical, we do have a quantifiable example of the positive environmental and social benefits that our products bring. I'll now hand it over to Richard for the financial summary. Richard?
Thank you, Jakob, and thank you for the kind words. Good morning, everybody. I'd like to start with an overview of our results for the half year ended March 31st. Demand has remained strong, helping us deliver 8% volume growth in the period, with particularly strong performances in electronics and energy and industrial. Our sales to value-added resellers continue to be robust at 970 tons in the period. Medical revenue continued to improve, with growth of 11.6%, but this was slightly tempered by some supply constraints in China. Overall reported revenue grew by 6% to GBP 160.1 million, and by 9% on a constant currency basis, with a 4% increase in selling prices compared to the second half of 2021, driven by growth in medical.
Gross profit grew by 4% to GBP 85 million, or by 8% on a constant currency basis, with gross margin broadly stable at 53.1%. It is worth noting that gross margin benefited from operational improvements and better asset utilization, but that this was offset by the impact of energy and raw material cost inflation, as well as currency. I will come on to talk about how we have been taking steps to mitigate this. Overheads increased by 6% on a pre-exceptional basis, which reflected wage inflation and some investment in growth-related projects. Our bonus accrual is currently slightly lower than last year as a consequence of the high payout made in FY 2021. Our underlying profit before tax improved by 3%, or 10% on a constant currency basis, and adjusted earnings per share by 2%.
Our effective tax rate was 14%, having normalized following the prior year, in which changes to UK corporation tax have impacted our deferred tax charge. We have started to implement an ERP replacement program that will be a critical step in allowing the business to develop digital tools in manufacturing and R&D, and with our employees and customers. Costs amounted to GBP 4.6 million in the period, which would previously have been treated as capital, and which we are now treating as an exceptional P&L item in line with IAS accounting requirements. We expect this to cost circa GBP 17 million and be expensed over FY 2022 to FY 2024. We finished the half with cash of GBP 45.7 million following payment of the final and special dividends in February, with dividend payments having totaled GBP 83 million.
The board is pleased to recommend an interim dividend of GBP 0.1340 in line with last year. Turning to the underlying year-on-year movements in profit before tax in more detail, we can see the benefit of a continued recovery in industrial and a better performance in med and medical, together contributing GBP 6.2 million of profit growth. We have also benefited from substantial operational improvements in the half. We have spoken before of our intention to drive a broad program of activity aimed at progressively reducing our manufacturing costs, as well as our Scope 1 and Scope 2 emissions. This is starting to gain traction, and taken together with a production volume some 45% higher than the prior year, led to a benefit amounting to GBP 8.7 million.
This has been an important factor in helping us to mitigate the impact of inflation in the short term. The impact of inflation in energy, material, and freight costs amounted to GBP 9.4 million. We have been particularly impacted by U.K energy costs and by energy and wage inflation affecting our Asian material suppliers. I will come on to our progress in mitigating this, which we are well-placed to do. The accrual for our employee bonus scheme decreased by GBP 1.6 million, as consensus assumes a lower absolute level of profit growth versus the prior year. We continue to invest in a number of targeted growth programs, which resulted in a year-on-year increase of GBP 2.3 million in overheads.
Finally, the currency headwind amounted to GBP 3.2 million, which we expect to be slightly higher in the second half, with an expected GBP 6 milllion - GBP 8 million impact for the year as a whole. Turning to average selling prices, we did see a sequential improvement by 4% to GBP 71 a kilo, compared with the second half of 2021. This was driven by growth in medical, where revenue grew by 12%, with progressive improvements in both the U.S. and Asia. Compared with the first half of FY 2021, the recovery in medical also resulted in a mix improvement amounting to around GBP 1 kg, but this was offset by the impact of currency to leave average selling prices around GBP 1 kg lower overall.
As we noted at our prelim results and at our IMS in February, we have set out to mitigate a substantial part of the impact of inflation through selling price increases, and we remain well placed to do this. We chose to follow contract renewal dates in a number of cases, which allowed us to start to increase prices in the Q2 . We have also chosen to respect a number of longer term contracts in areas such as medical, which means some increases have not yet taken effect. As a consequence, the benefit of selling price increases in the first half was not particularly material. Looking forward, we expect further selling price increases to mitigate a substantial proportion of the run rate of inflation in the second half, as expected.
This would have the effect of increasing selling prices by around GBP 3- GBP 4 kg , but there will be some offset from currency. We're also mindful of mix in the second half. On the one hand, we expect continued strong growth in industrial demand, particularly from the value-added resellers. On the other hand, we are seeing some very short-term impacts of the lockdowns in China affecting our ability to ship medical products. We therefore do remain slightly cautious about selling prices in the near term and for now would expect a modest overall improvement in the second half. I will cover gross margin in more detail on this slide. You can clearly see the two principal drivers whereby operational improvement is more than offsetting inflation, as already explained.
We also saw a slight mix improvement from growth in medical sales, but this was offset by a small impact from the currency headwind, and as a result, gross margin was relatively stable at 53.1% compared with 53.9% in the prior year. It is worth remembering that for this year and next year, the commissioning of our China manufacturing facility does create a small drag on margin, which we expect to start to reverse in FY 2024. That development, together with ongoing operational improvements and further recovery in medical, does continue to present the opportunity for good margin improvement over the medium term. As we have commented on previously, we still believe that these factors will allow for a recovery towards the high 50s. For the near-term outlook, though, it is worth noting the moving parts we expect to see in the second half.
Firstly, as noted, we're implementing price increases, which in isolation would enhance our gross margin. However, this will be offset by slightly higher currency impact in the second half, along with the short-term mix effect I have referred to. It is also worth noting that inflation of our raw material prices impacted us later than might have been expected, with the result that the impact for the year is weighted roughly 60% to the second half. Therefore, we do anticipate the gross margin in the second half may be slightly lower than in the first. Subject to demand holding up and our price and efficiency actions landing as planned, we would expect margin improvement in FY 2023 showing progress towards our medium-term target. On our next chart, I've shown our treatment of currency on the face of the P&L in line with IFRS 9.
As before, the individual line items are recorded at a weighted average spot rate, then the gain or loss on forward contracts is shown as a separate line item within gross profit. Comparing our first half with the prior year, we can see that sterling strengthened versus the U.S dollar, with the weighted average rate moving from $1.31 - $1.37. While versus the euro, it remained steady at EUR 1.14. This led to a GBP 3 million headwind in the half after the impact of currency hedging. It is worth noting the expected effective US dollar rate for the second half of $1.38 compared with $1.29 in the prior year, and for the euro, EUR 1.17 compared with EUR 1.14.
This therefore leads to a greater headwind in the second half and also a negative impact on gross margin percentage when compared with the first half as a consequence of our treatment of hedging benefits. Overall, we expect a headwind for the year of GBP 6 million-GBP 8 million, with FY 2023 at the moment looking to be broadly neutral. If I touch briefly on China, we have continued to make very good progress. We remain on track for mechanical completion during our Q3 and commissioning later in the year. There is a risk that the plan could be affected by lockdowns, but we have so far managed to avoid any material impact of those. Our target remains to have saleable product in FY 2023, and we will provide a further update at the end of this year.
Our commercial opportunity continues to grow and remain sizable across a number of end markets in China. Our progress can be seen from the latest picture. We have achieved nearly 1.5 million project hours on site, and safety performance continues to be strong with over 900,000 hours since the last minor safety event. Finally, we're pleased to report another good cash performance despite our high capital expenditure, which was in line with expectations at GBP 26.7 million. Our working capital outflow of GBP 21.9 million was a reflection of the timing of CapEx and the small inventory build primarily in raw materials. We have not suffered any material impact from the challenges currently being experienced on global supply chains, but we have increased our safety stocks of a number of imported materials as a proportion.
Our tax outflow was relatively low at GBP 5.6 million. We do have borrowings of GBP 9.3 million, which relate to a facility we have established in China to support investment in our assets there. Dividends amounted to GBP 83 million, including GBP 43 million for the special dividend. As a result, our cash balance at the end of the period was GBP 45.7 million, which includes GBP 3.8 million ring-fenced in China. Looking forward, we expect CapEx of around GBP 60 million for this year, possibly something similar next year as we conclude our China investment and also carry out some process improvements in the UK.
We should then see a step down in CapEx to the order of 10% of sales, which reflects an expectation that some additional CapEx will be needed as we progress towards our net zero goal. In thinking about our investment plans, our target remains to return the business to a 20% return on capital over the medium term. We review our existing and new investments on a continuous basis to ensure that this can be achieved. Thank you very much, and I will now hand back to Jakob.
Thank you, Richard. Now turning to the industrial update on slide 13. Firstly, we have started now to report again on material unrealized net revenue number. Remember that this is a measure of the health of our core business application pipeline and is based on the potential of all targets delivering. I'm pleased to say that we saw 6% growth in the core application pipeline versus the first half of the year. With an annualized revenue now of around GBP 300 million. Looking at our end markets then, firstly in automotive, you know, while, like most peers, we saw the impact from the semiconductor chip challenges in the second half of 2021.
We have seen more recent improvement in our Q2, we saw a sequential growth of 13% over Q1. We are seeing a better short-term picture for auto, though this will remain patchy, you know, over the year for sure. You know, we have seen forecasts for the overall production in the automotive industry being revised down as of late. I think the expectation in general is that the output will be flat year-on-year with some greater growth next year. As I said, you know, Q2 was a good one, much better than Q1. The demand has been quite volatile, as you might imagine. On a half-on-half basis, volume were down 8% altogether, though. This does reflect the worst impact of semicon from last year.
On some of our new programs, however, I will come back to talk about our e-mobility in a second. For PEEK Gears, the pipeline remains healthy, and we're seeing some growth in what we call Resin Plus business, where we help design the application. Our IP is in the development, but the manufacturing is supported by partners. Resin Plus effectively means that Victrex gets to pull through on demand for a polymer to support gear sales. Remember that PEEK Gears sold over £1 million last year. For FY 2022, we expect modest growth above this level. In aerospace, last week, I was with our aerospace team at the JEC World show in Paris.
We saw a great recognition for our composites program there, and we have seen a steady sales of our composite-based parts for prototypes, some of which were on show in Paris in the form of large structural pieces, bulkheads, ribs, and other very large parts of the plane. As a recap, we have a number of programs with our major OEM, including the well-published one via Airbus, the Clean Sky 2 program. The main product, which is gaining traction in the aerospace industry for us is our A250 low melt PEEK polymer. Remember that this offers faster processing benefits for the processors. The cycle time's reduced by at least 25%. We also have an A250 composite tape form in polymer form, and obviously in parts as well, with a good range of qualifications right now.
Also, A250 offers good sustainability benefits with good recyclability. Obviously, you know, PEEK's ability to be molded means less scrap in the whole value chain. In our aerospace business, we have seen a steady improvement to deliver 4% growth year-on-year. It's a steady recovery, but it's fair to say that we've seen greater activity levels and interest over the last six months or so. Whilst we have seen a significant impact on the business in the short term, you know, we're starting to see a slow but secure ascent there now that build rates are starting to pick up again, particularly, you know, with Airbus getting close to it, their pre-COVID levels, you know, maybe 10%-15% short of where they were pre-COVID.
In energy and industrial, 14% growth, which was supported by high activity levels in energy, which was up 23%. The industrial part of this segment includes applications for food processing, robotics, and the like, and other general industrial applications. If we then look at the energy part, most of this business for us remains as onshore oil and gas, whether that be the U.S or the Middle East, but we're making progress in other alternative technologies also, including hydrogen, wind, and carbon capture applications. For Magma, I will come back and talk about that separately a little bit later. Turning to electronics, you know, further progress here with 8% volume growth, despite smartphone shipments being down over the same period by approximately 11%.
Semicon demand remains very healthy and we have a strong play in semicon, as you know, with both CapEx and the OpEx side, you know, being strong benefiting our business also. Finally, value-added resellers, a very strong performance despite tough comparators. Volumes up 14%. Remember that VARs largely correlates with many of our end markets, particularly energy and industrial, automotive, and electronics. We continue to work very closely with all our customers to gain insight on their order books to allow us to optimize the supply chains between us and to develop new applications for OEMs and mutually support growth. A very pleasing performance here, and the order book in the VARs area remains healthy right now as we speak.
If we now move on to slide 14 on e-mobility. Firstly, some good news on e-mobility. We talked about the development programs we have been building over the last couple of years. We now have a healthy double-digit pipeline of the next generation of high voltage application programs for the motor and some battery opportunities as well. Pleasingly, 2 of these are now at SOP, and we'll start, I think, to see e-mobility revenues building from this year onwards. Our application areas are focused around insulation, be it against heat or electricity. Remember that PEEK offers excellent thermal insulation and the dielectric properties are conducive for use in high voltage application. We know, for example, that there is also sustainability from using S-PEEK versus enamel insulated coating wire, as an example.
It has process benefit at times, and also helps to reduce solvent emissions from the incumbent processes. One of the new business wins is replacing polyamide to this. So this is a great example of PEEK being chosen for a combination of properties actually, and more to come here. But good news, and we look forward to seeing revenue build here from next year onwards. If we move on to Magma on slide 15. We recently had a presentation to the Victrex board from some of the senior TechnipFMC leaders. As you know, Victrex's equity was acquired by TechnipFMC, and they're putting significant capital, time and resources now into scaling up in Brazil, including building a new facility there. Bid programs are currently out to tender, and it's down to Technip to update on the outcomes of those.
Safe to say that we're quite optimistic on the progress here. Using a hybrid flexible pipe with steel armoring surrounding the PEEK core offers 50% weight savings compared to a metal flexibles and is also a free-hanging solution. The quote on the slide is from TechnipFMC. They regard the hybrid pipe as the most cost-effective riser solution for Brazil. Less need for buoyancy boats, less need for offshore welding, given the solution is manufactured onshore, as an example. For Victrex, remember that the pipe is based on Victrex PEEK and Victrex composite tape with all the qualifications built into the program. We also have a support and services agreement with TechnipFMC. As it relates to timing, the focus for FY 2022 remains the qualification programs and manufacturing test-based pipes.
TechnipFMC are then looking to be ready for scale-up in 2023, in the latter half of that year, and are committing CapEx and resources to do this on a significant scale. Overall, it's fair to say that we remain very pleased with the progress on Magma. Moving on to Medical on slide 16. Very pleasing performance here with revenues up 12% as surgery has begun to return in greater numbers. We saw growth in all regions. Although Asia saw a record growth performance in the first half as economies there opened up faster than elsewhere, and we saw 38% growth in Asia. Spine remained in growth but was offset by the Omicron impact in the U.S. in late 2021. Pleasingly, we have seen sequential progress, though, in the calendar year to date within the U.S.
In non-spine, good progress with 25% growth, and non-spine now bigger than spine as we grow across all segments, particularly in trauma, but also in cardio and drug delivery applications. Looking forward, as we just noted, China lockdowns are one to watch for Medical, given access into China supply chain right now, as I'm sure you're all aware of. Overall, pleasing progress, and Medical is clearly an area that we expect to see good growth over the coming years, and obviously that will support mix to a great extent. Now move on to knee. Knee is one program that has moved faster than our expectations over the past 12 months.
We're now halfway through patient recruitment with 15 patients implanted with PEEK-based knees across Belgium and India, and 3 patients are beyond the 12-month stage without any complications. As I said, none of these patients have needed any intervention, so this bodes well for the trial as a whole. Our next steps with our partner, Maxx Orthopedics, is to complete the trial for the 30 patients. We're also looking at establishing a trial site in the US in the second half. Recently, I visited a major top 5 orthopedic company, and we're hoping to close an additional partnership very shortly. The demand pool and interest levels from major orthopedic companies has increased since the clinical trial started, as you might imagine. In summary, excellent progress. A great opportunity.
Remember that knee, the global market for knee is at least $10 billion on an annual basis and probably a $1 billion addressable opportunity for Victrex. To put it in perspective, you know, today, roughly 13.5% of the population is over 60. You know, in 2050, it's predicted that that's gonna be around 22%. I think, with an aging population and a more active population, this opportunity is only going to grow. We're looking ahead to completion of the first patients early next year in the clinical trial, and hopefully we can start the commercialization soon thereafter. Ever so briefly on the bubble chart on slide 18. The main movers here are Gears.
As I said, we're anticipating growth on the GBP 1 million revenue from last year, thanks to both parts and ResinPlus-based revenue. We're expecting that to be significantly larger this year. In e-mobility, we have secured new business wins which will already start contributing revenue towards the end of this year. Overall, our growth pipeline remains strong with a broad portfolio of programs. The specific milestones for each of these mega programs are shown in the appendix to this presentation. On slide 19, again, on ESG, as I said at the start of the presentation, we have a strong ESG profile and a great story to tell in terms of how our products can help us to reduce CO₂ emissions through lightweighting with quantifiable benefits in the likes of aerospace and automotive.
In terms of our net zero ambition, we're looking at alternative fuels and alternative processes and technologies as a way to deliver our 2030 net zero goal. This will be complemented by the likes of renewable electricity, which I talked about earlier. We're now more than 95% renewable electricity for our global footprint and 100% for U.K sites. The big way for us to close the gap will be reducing the climate impact for our own operations. You may have seen us lobbying for access to hydrogen as one example. Indeed, we've been building links to other partners to see if this can be done for our main U.K manufacturing assets, particularly those in the Northwest.
As the chart shows, if we model our own business growth without any mitigation, our emissions would accelerate significantly, which is why we're setting out the ways we can get to our net zero goals in quite a clear way. We will update you more on this, you know, as we move forward. On the outlook to finish off, we remain positive about volume growth going into the second half, even if we're mindful of the changing economic environment. If we look at the end markets, you know, electronics, energy and medical, we remain positive on the outlook for all of those. The semicon market is still seeing very healthy demand.
Oil prices are at high levels right now and are likely to remain high, obviously both well for our energy business and are highly correlated, you know, with our performance in that area. Activity levels in medical with returning surgeries give us a reason to be optimistic about the prospects there. On aerospace and automotive, you heard me talk about aerospace. We're seeing a steady ascent there, and I think that's something that we expect to continue. With automotive, you know, it will remain volatile between now and the end of the year for, I think, well-documented reasons that you all follow very well. On slide 21 to wrap up, we're focused on volume improvement in the second half, which should look better than the first half and consensus volume of 4,500 tons.
I think we'll definitely come in quite a bit higher than that. We have clear plans progressing to mitigate additional inflation that we have seen recently, and it is pleasing that our operational improvement would have seen good margin progression were it not for the significant impact of the inflationary impact, which we are focused on recovering, as Richard talked about in his part. Overall, we are focused on a good year-on-year growth. Our core business is in excellent shape. We've grown the core, you know, over the period of COVID, and it's coming out of COVID stronger than it ever was before. I think we have short-term growth opportunities around the core, and they will stay with us going forward as well.
We're also getting closer in time to where the mega programs will start to significantly add to our top line, as evidenced by the comments that I mentioned relating to Magma in particular and the e-mobility also. Last but not least, our ESG credentials are growing, and we have a clear plan to progress us towards our net zero goals. Thank you all for listening, and I'll now hand it over to Q&A.
Thank you. If you wish to ask a question, please dial zero one on your telephone keypad now to enter the queue. Once your name has been announced, you can ask your question. If you find your question is answered before it's your turn to speak, you can dial zero two to cancel. Once again, that's zero one to ask a question or zero two if you need to cancel. Our first question comes from the line of Chetan Udeshi of JP Morgan. Please go ahead. Your line is open.
Yeah. Hi. Thanks. Morning. You know, a bit more direct question to start with, and Jakob, you were referring to upside to full year 2022 consensus volumes. If I do my math, that would suggest that, you know, the volumes in 2022 should be probably close to 10% higher than what you guys did in 2018, which was the sort of, you know, last say peak before the slowdown and COVID, et cetera. But then when I look at the PBT consensus, we are still talking about something which is down almost, you know, 25% versus that level. I was just calculating that's about GBP 30 million lower. Out of that, GBP 5 million is FX.
I mean, my question is, you know, we can see a lot of focus on growth, which is great. Is there a sort of, you know, more relaxed approach on earnings, to achieve that growth now? Or, is that not the case? Because I guess the concern is that, you know, we are seeing growth on volumes but not on earnings. At what point do we start to question, that incremental growth is not resulting in the same, you know, contribution to the bottom line, if you will?
Chetan, good morning. I'll take that. Firstly on your volume assessment, I certainly think you're in the right ballpark. If you took 2018 volume, took out the large electronics contract and then went up by about 8%-10%, you're in roughly the right area. There have been significant moving parts on earnings.
The biggest would be currency, which over that period is going to have been of the order of GBP 14 million-GBP 15 million. Then inflation, which actually is probably even slightly higher than that. So somewhere between sort of GBP 15 million-GBP 20 million over that period. So you very quickly understand why the current rate of earnings might be lower. Then I think thirdly, we've got to bear in mind that we have made a number of investments in parts businesses and in China, all of which are progressing towards a desired rate of profitability, but are not there yet. They have represented a drag on gross margin. I don't think there is any letup in the focus on earnings at all.
We have been in a period with some fairly unprecedented economic movements, which we are in the process of managing our way through. We have deliberately invested in downstream activities which are focused on expanding the market for PEEK. If we didn't do that, we wouldn't have the future growth opportunities that the business does currently face. That's therefore how we find ourselves where we are. We have signaled that our target for gross margin remains in the high 50s% and our return on capital employed target remains 20%, and we are very focused on a very regular basis on how to return to those targets.
Understood. Maybe if I can follow up on the comment around the core pipeline, can I ask how should we re-read this number? Because it says mature analyzed revenue of GBP 303 million. I mean, the run rate of revenue today is GBP 330 million. How should we read that commentary around pipeline and what it means for future growth? Because I'm a bit confused how to read that specific number.
Yeah. Chetan, and I'll take that. That's our assessment of what that pipeline could deliver at maturity. There's obviously an element of risk associated in there as well, which is why that number looks so high. There's an element of having to risk adjust that as well. It's to present the scale of the sorts of spaces in which we're seeing new opportunity to use PEEK in the core business where there are many people still approaching us about new opportunities and us finding new opportunities to use PEEK inside the core.
Is this all incremental to existing revenue, or is this including some of the programs which are in current revenue base? Because otherwise we are talking about almost doubling of revenue, right? If all of these pipeline were to materialize.
Yeah. There'll be a mixture of cannibalization in there as we see different opportunities come through replacing some of our products in there. It doesn't include any of the mega program revenue. That's separate.
Understood. Thank you.
Thank you. Currently we have one further person in the queue. So just as a reminder to participants, if you do wish to ask a question, please dial zero one now. That next person is Charlie Webb from Morgan Stanley. Please go ahead. Your line is open.
Yeah. Morning, gentlemen. Thanks for taking the questions. First off, can you just share your latest views on the cost buckets as we think of the kind of the year-on-year positives and negatives FY 2022 versus 2021? Obviously lots of moving parts. Inflation continues to run high. If you could clarify the various bits and pieces within that as we think of the bridge would be very helpful. Then just secondly, on pricing, you kind of mentioned some parts, you know, you're pushing pricing, albeit it sometimes takes a bit of a lag to come through. Other parts, you know, unlikely to push it through, given the kind of the longer term nature of the contract.
Just trying to understand what portion of the business have you been pushing pricing? You know, what order of magnitude, and you know, any chance that we're gonna see kind of surcharges from you to tackle some of this near-term inflation? Thanks.
Charlie, good morning. I'll start on that one. We indicated in the first half that the impact of inflation was around GBP 9 million. I've indicated that sort of roughly the impact for the year is roughly 40% first half, 60% second half. That's a pretty clear indicator that we expect the impact for the year to be a little over GBP 20 million, and that is about two-thirds energy, one-third materials, if that helps. I think it's always worth noting in our case that primarily our material inflation is not commodities as other chemical businesses might see them. This is more to do with us buying intermediates, specifically from Asia.
You know, some of those are on long-term contracts where we've been able to manage the extent to which those increases affect us in the short term, which is why some of that inflation hasn't landed until a little bit later in our financial year. That gives you an idea of the shape of the inflation. I think what we've indicated around pricing is this is not a commodity business, as we said before. We have predominantly in our customer base very long-term relationships, contracts covering the vast majority of our business. We have felt it prudent to respect those contracts to address pricing increases as those contracts have become due for renewal.
That did give the opportunity for price increases to be put in place during our Q2 , mainly taking effect towards the end of the quarter or early in the third. It has meant that there are a number of areas where we have customers on longer term contracts, where we're not yet ready to increase prices. There is more to come. Therefore, we have not implemented surcharges of any material degree. We think for us, this is the right approach. We're a high-value business, and a very important point is that as things progress, we would expect those prices to be pretty sticky. In other words, we would expect to be sustaining those price increases for the longer term. It's a different mechanic.
Don't particularly wanna be precise as to exactly how much of that raw material and energy inflation we will recover, but the point I made is that if you take the second half run rate of inflation, we expect to be recovering on a run rate basis a very substantial part of it.
Very helpful. If I could just have squeeze one more in. Just on the demand side, you know, you seem pretty constructive on the demand outlook, you know, as we are today, looking at your order books. Are there any signs of any nervousness from any customers in any end markets? It's just, you know, obviously we hear a lot about the consumer and the pressures that we are facing and others are facing around the world. Just wondering if any of that is kind of materializing in any discussions you're having with customers at this stage? Or is it all just talk, and for now, you know, the numbers just and the orders just keep ticking on in?
Yeah. I think the way we are approaching it, Charlie, is that the only certainty these days is uncertainty. Sure enough, you know, the order book for us, you know, looks very healthy as it looks towards the end of the year. I think everybody and anybody in business these days has to make sure that this, the ship is going to sail through a potential storm as we head, let's say, into the Q4 of this calendar year and into the next one. I mean, we are seeing GDP forecasts being revised downwards in all of the major economies. We're also seeing interest rates, you know, rising again, even if they're, you know, not really high by historical standards by any means.
I think, you know, there are some clouds, you know, on the horizon that anybody in business needs to be mindful of and be ready to deal with should they actually pan out. I can certainly say that our team is ready to tackle those. As it relates to conversations with customers, it's interesting these days that while everybody's keeping their eyes on this long-term horizon that I was describing, that is uncertain, you know, if we look at our vast customers, you know, their order books are full, their lead times are actually quite long, so the demand situation is healthy, and they've not been able to recover their level of safety stocks, you know, during this past 12-18 months of recovery post-COVID. They're very.
You know, as I said before, we're looking to see sort of a flat level of production for 2022 compared to 2021, but there is still a belief in a catch up in 2023 and onwards. You know, we are expecting sort of a healthy outturn for automotive between now and the end of the year, and probably going to see a second half that was better than the first. Aerospace on a slow, but I think secure upward trend. There is need for investment in the newer planes. I think, actually we might see some of the older planes retired faster, in the face of rising energy prices, where fuel efficiency, lightweighting and efficient motors count for more than they ever did before.
I think there is a healthy underpinning for a steady growth in on the aerospace side. Electronics, as I alluded to, good signs from the semicon sector of the business. Consumer electronics, you know, might be faced with some difficulties, you know, with higher inflation for sure. We've seen a contraction in smart devices over the recent horizon. I think overall, with our exposure to semicon, that underpins our optimism for between now and the end of the year. Clearly medical, you know, we have still room for improvement given that, you know, most countries are not at pre-COVID levels as it relates to the number of elective procedures that are being performed.
I'm saying that, though, with the caveat of the situation in China, because I don't think we've seen the full impact of the lockdown in China yet, and it's likely to be a cascade of closures throughout different provinces if they stick to the zero COVID policy. That will definitely provide for some supply chain and logistical challenges, to say the least. I think, you know, very optimistic based on the demand for the short term and between now and the end of the financial year. Certainly a lot of favorable macroeconomic drivers, but also worrying signs that we need to be mindful of. It's a balanced picture as you would expect.
All right. Thank you very much.
Thanks, Charlie.
Thank you. We've had one further person join the queue. That's Kevin Fogarty at Numis. Please go ahead. Your line is open.
Thank you very much, and thank you for the presentation. I just had a question really on the inventory levels. I think I picked up in the presentation, you haven't seen sort of material kind of supply constraints, but safety stocks have been increasing. I just wondered sort of what's, you know, what they're reflecting there. Do you think that's, you know, the risk of supply constraints is increasing here? Just if you could give us a feel for what sort of level of investment this might require, as we look through the sort of full year. You know, are we seeing a kind of step up in terms of the sort of inventory investment you think you need in the second half of the year?
Yeah, it's a good question. The increase in inventory has been driven by two things. Firstly, raw materials and intermediate, so that's about GBP 5 million. And then actually the balance of it was the, if you will, the effect of inflation. In other words, we see inflation come through in the period. A certain amount of that is held in stock given our relatively high stock levels. And so that was the balance. We haven't had any material impact of supply chain issues. Certainly we've seen bottlenecks, for instance, in Chinese ports, equally Japan, which, you know, could maybe have caused some disruption, but we've worked our way through those.
In fact, this is really just more of a precautionary approach, given that at the moment, supply chains are a little bit unstable around the world. I think we would probably wanna do a little bit more. You could see a few more million GBP going into inventory, assuming these kind of conditions continue for a while. That would be about the extent of it, I think.
If I may sort of expand on it a little bit, you know, we are a critical part of our customers' business, given the nature of our product, given the specifications and given, you know, our reliability here. Reliability as a supplier is key for us. We have navigated COVID incredibly well, delivered with way over 90% delivery on time and full. It's not been without challenges, but we have stuck to that. Even if we're a highly sort of technically and scientific-based business, we're also a high service level business. That, you know, relates to both our reliability as a supplier, but also as it relates to tech service and helping our customers solve manufacturing challenges, fit the product in the appropriate way into formulations for different applications.
It's not just about the technology, it's very much about the service as well. We are very much driven by the commitment of not leaving our customers hanging high and dry. We've, I think, gotten great accolades for our performance, you know, both during the COVID period, not the least in the period of recovery as well, when demand recovered at a very fast pace and is running at a very fast pace even as we speak today, with loads of supply chain challenges that needs to be managed on a day-to-day basis. That's likely to, you know, lead to the outcome that Richard was describing in a quantitative way. Qualitatively, this is a part of our strategy, absolutely fundamental part of our strategy to be the reliable partner, both on logistics, supply, availability, and technical service.
Sure. Okay. No, that's.
so.
Right. Okay. We should sort of read it as, yeah, the sort of measures and steps to ensure you don't have any sort of supply issues effectively, and you can keep that continuity of supply going.
Exactly.
Sure.
you know, naturally, given the challenges in the supply chain, this will lead to increase in safety stock levels for both raw materials and products, and Richard has quantified that.
Sure. That's helpful. Thank you for that.
Jakob, can we just point out to facilitate, we'll take questions in the room at this point?
Yes. We're just emptying the line on the phone and then we'll turn to the room in the reverse order actually that we had planned.
Thank you. There are no further questions on the phone at this time, so please go ahead.
Brilliant. Thanks, guys. Henry Carver from Peel Hunt. Just one slightly in relation to the last two queries and just thinking about the stocking levels at customers across the business, but predominantly VAR. Is there a sense that some of the volume growth coming through at the moment being that strong is kind of over ordering on their end just because of the general kind of supply chain panic situation? Not quite panic, but you know. If that is the case, you know, how should we look at that over the next six, 12 months, do you think?
Yeah. I think there's bound to be some element of that in all supply chains around the world these days. You know, you heard this phrase, you know, companies moving from, you know, just in time to just in case. You know, some comments on the sort of global macroeconomic level saying that there will be a lot more localization going forward as well, because people are not as willing to be reliant on long supply chains, actually, and will try to be more independent of that. I think, you know, in our case, we have worked quite closely, particularly with the VARs as of late, to synchronize our demand assumptions to the effect that our order book probably with them never has extended as far out into the future.
That's basically saying we are mirroring their demand on our supply plans as well. That leads me to believe that there is probably less of an impact in the short term from overbuying, if you wish, than there otherwise would have been. There's less of a herding with that constituency than you might have seen in the past, number one. I think that's definitely a point. I think we've benefited from that synchronization. We worked extremely well together on the downturn. When the sharp upturn came along, I think we used that opportunity to get closer to their planners and supply chain people than we've ever been before. I think our demand picture as it relates to their demand is clearer than it's ever been and likely to result in lower overbuying.
They are still running flat out themselves, as I said before, so they have not been able to build up their inventory. I do think that it's a fair assumption that some of their customers will definitely build in a higher level of safety stock than they have had in the past. I'm not sure there is herding of material, but there's bound to be some increase in safety stocks across all supply chains in the world based on the uncertainty that, you know, all of us are very much aware of. There'll be some element of that for sure. You can go look at the flip side of it and look at the macroeconomic drivers as we sort of try to talk through it. High energy prices, high demand for semicon.
There is very high end demand for the end product also. There's no absolute answer, of course. But I do think that in our numbers there might be less reflection of herding than it might have been in prior years, primarily because of the synchronization of demand assumptions and the fact that our immediate customers are running flat out still.
Hi, thanks. David Farrell from Jefferies. Question about China. Can you just kind of remind us when that starts up? Are they all incremental volumes? Give us some sense of the ramp-up phase, how many years that will take, and to what degree that will be a drag on margins until it turns profitable. Thanks.
Sure. We are expecting commissioning to take place during the balance of this calendar year. We have noted a little bit of caution around the current lockdown situation, but I have to say we haven't actually been impacted materially by that so far. You know, hopefully we'll carry on as planned. That means we get into commercial volumes during 2023. There has to be a certain number of product certification processes. The regulatory environment in China is at least as demanding as elsewhere in the world. We probably don't see an easing of that impact on gross margin until 2024. The demand is definitely there. I think the way to look at it is that the output from the plant would be substantially incremental.
We are making a different grade of PEEK to that we would predominantly supply at the moment. That opens up different and new opportunities to us. You know, frankly, every time we look at the market, there are more and more opportunities there. We measure a pipeline that keeps on getting bigger. Hopefully that gives you an idea of the shape of how that's going to evolve.
Yeah. Perfect. Thanks.
Hello. Good morning. Adrien Tamagno from Berenberg. One question on the U.K debottlenecking. Can you quantify maybe what would be the structural cost savings from this investment when it's completed?
I think it's. We wouldn't give out the exact number here, but the driver is twofold. On one hand, it's productivity improvements. You could also look at this as cheap CapEx investment as well. You know, giving us relatively inexpensive capacity increments by debottlenecking the plant. Related to the first one on productivity, you know, a part of it is also related to our ESG strategy to make sure that our facilities are efficient as possible from an environmental and safety perspective. We have talked about it before that you know, the size of it. What was the initial total size of it that we've broken down the CapEx with debottlenecking?
We've spoken previously of the order of GBP 15 million.
Right. That was initially anticipated to be done in one year. Now we're seeing a better way to actually execute it, so we're executing that over a number of years, actually. It does these two things. You know, part of it you have already seen in some of the numbers that Richard was presenting earlier on productivity and how that's mitigated cost increases. That has a productivity impact.
The other part of it also helps us meet capacity needs and growing needs for volumes going forward in a probably more balanced way than to have to go for large-scale investments like we did with PP3 in 2015 or so, when we went with new capacity to the tune of around 3,000 tons in one swoop for about $100 million at the time, GBP 100 million at the time. Think of productivity gains and this being as a source of productivity gains and ESG efficiency. Secondly, you know, a more balanced way to get capacity on stream through less expensive ways, if you wish.
Hi there, Samuel Perry from Credit Suisse. Just a question on Magma. It's made its meaningful revenue of GBP 1-2 million, but on the mega program chart, it's always indicated as sort of a GBP 50 million-ish revenue or thereabouts. It's had meaningful revenue delivered for a while. How do we think about the ramp up to the GBP 50 million-ish or thereabouts?
Yeah.
Is that something that continues to get pushed out?
No. This one is actually a very simple one, and that is that, you know, we have seen meaningful revenue for a while through qualification material being sold. That sort of defines the level of revenues from Magma to date and until you start to see a deployment in Brazil. We'll probably see some increased revenues from qualifications in the near term, but they will be of similar orders of magnitude. Then when it ramps up for risers, you know, in the Libra field, that's when you see the real kicker. You will start to see some of that coming in in 2024 through the rest of this decade, essentially.
The journey towards GBP 50 million is still secure in that project, but it's all dependent on TechnipFMC's ability to deploy. They're putting in significant resources to deploy in a particular field where you can't get access without this technology. I think that it's about timing, but I think the revenue is still secure.
You know, I should also mention that there are other sort of emerging opportunities with flexible pipe, both related to hydrocarbons, but also related to renewables, and then particularly in the area of hydrogen. That's probably something that we'll be featuring more prominently, you know, as we go forward as well.
Good morning, Andrew Stott from UBS. Had a couple questions. I wanted to come back on the pricing issue. I just wonder what's holding you back. Like, what are the consequences of putting prices up? Because even your commodity peers, and they're not competitors, they're peers, are getting price increases of 20% plus.
Yeah.
It feels as though it's never easy getting price increases, but in this environment, it's easier than most. Why not put prices up or break contracts and put surcharges in? What holds you back?
I mean, this is, you know, we've chosen to honor the contracts, and we feel, you know, implementing surcharges is a bit of a draconian measure. You know, we have been growing our share. You know, if we compare ourselves or use your comparison of some of our peers that are probably, you know, have a greater portfolio of commodities, it would be interesting to see how the price increases are split between commodity and specialty. I guess you might be hearing a similar story there. We are not a commodity business. You know, we know what we mean to our customers and their customers. We do honor contracts. It's a reputation that you earn over a long time, and I'm sure we'll reap the benefits of it when the tide changes also.
It is a part of building the business and the health of the business for the long term, even if you may suffer a quarter or two. We know that our business, once we get it usually stays with it for long. It is in these defining times, that your performance is really evaluated and assessed, and that's how you can build a long-term franchise.
Andrew, I think there's a really interesting dynamic with many of our customers, where if we're not careful, they feel like they're held to ransom. We have to be really careful not to do that because we want them to continue to be with us on an ongoing basis. If we overplay our hand in situations like this, it becomes really damaging to the relationship. It's how we balance those two off.
Okay, that's clear. A second question, completely separate. On autos, you usually mention that your autos volumes for the half are down 8%, which to me is similar to how global auto production looked for the period.
Yeah.
I would have expected more because your loading per vehicle should be going up due to EV.
Yeah.
Can you square that circle? Thanks.
If we look at it, we were down H1 and H1 7%, Richard. If you compare H1 2021 - H1 2022, 7%. I think we are going to look at probably a significant growth H2 on H2. Remember that there was quite a bit of suffering in the second half of last year, Andy, and I think we'll see a better second half this time around. We definitely see that we are increasing, you know, our share of wallet as well. You know, a few years ago, we might have been at around 8 g. We're probably above 10 right now. I think you're only gonna see that number grow as we grow forward.
It's still difficult to compare numbers of manufacturers' cars in a quarter to our sales in a quarter because there is quite a long supply chain between ourselves and when the car comes off the conveyor belt. I do think, you know, you should expect to see the long-term trends there still though going to a higher content per car. If you remember sort of our reference milestones, they went from 8 - 10, penetrating existing applications mainly associated with the ICE, up to around 20 as an opportunity with gears and up to 100 with e-mobility. I think these are useful benchmarks that we feel quite comfortable with still, and I think are valid ones.
If you then look at the content per car in an EV world where we might have a substantial part of the, let's say, material associated with insulating wires in high performing, high voltage motors. You know, some of the things that will translate across in terms of bushings and bearings and actuators and things like that associated with battery materials and brake parts. I think, you know, the average content in a car that has all of that is obviously measured in hundreds of grams, if not more. I think it's still a useful figure to benchmark this average per the overall car produced, and we're definitely on the right trajectory there. It's very difficult to square on a quarter-to-quarter basis.
I think, Andrew, don't forget the chip shortage has created a volatility. The recovery out of COVID has not been smooth in auto. Initially probably a recovery that was faster than people expected. We certainly saw the benefit during our second half last year with very strong growth. Also then the noise around the chip shortage was particularly acute in roughly our Q1 , so October to December. You've seen that come off again, and as Jakob has anticipated, we expect a better second half. There's been quite an overlay from that market volatility.
Not to mention the Ukraine atrocity as well, impacting German manufacturers to the extent that some of them had to shut down for quite a considerable time also. There's all kinds of curve balls being thrown and impacting the demand pattern in this particular sector.
Hi, [Raquel de-la-Sota from BNP]. Just a quick follow-up on costs. I think you booked 6% underlying overhead inflation in H1. Should we use that as a guide point for the second half? Then secondly, in the medical business, how much visibility do you actually have on the improving medical rates, in the U.S given the slowdown in the end of last year? Thanks.
I'll take the first of those. Yeah, that's probably about right for the second half, maybe even slightly higher. But I would use that kind of order of magnitude.
On visibility then, of all industries, medical is the one that is the most impacted by COVID in and out. Particularly if you're talking about non-elective surgery, which is where most of our business is. There's a mixture there of patient confidence or surgeon confidence and incapacity to deal with elective surgery on top of the non-elective procedure. We keep pretty close measure on what's going on with, particularly the spine market and, we've seen stuttering progress in the U.S. We saw very strong recovery in China. Now, of course, the big question is what's gonna happen in China?
We should also look at the fact that, if we look at titanium versus PEEK in there, then we've been looking at that trend on an ongoing basis. We continue to strive really, vigorously to get a porous PEEK offering 'cause we think that that's the best surgical, procedure option. We continue to work towards getting FDA approval for that process. Once that's in place, I think we'll see a really significant change there.
I don't think there are any more questions in the room. Are there any more questions online?
No, no further questions on the phone at this time.
Thanks everybody for attending the call, whether it's on the phone or here at JP Morgan, and we look forward to speaking to you again once we talk about the Q3 results. Thanks, everybody.