Earnings Transcript for VCT.L - Q2 Fiscal Year 2021

Operator: Hello and welcome to the Victrex Interim Results May 2021. Throughout the call, all participants will be in a listen-only mode. And afterwards, there’ll be a question-and-answer session. And just to remind you, this conference call is being recorded. Today, I’m pleased to present Jakob Sigurdsson, CEO. Please go ahead with your meeting.

Jakob Sigurdsson: Thank you. Good morning and welcome back to Victrex’s 2021 half-year results presentation. I’m Jakob Sigurdsson, the CEO of Victrex and I’m joined here today by Richard Armitage, our CFO; Martin Court, our Chief Commercial Officer; and Andrew Hanson, our Head of IR. Well, we’re sorry we can’t be with you in person today. For our full year results in December, we hope to be in a position to see you all in 3D, given good progress on global vaccination rates in the fight against COVID. Before we start, just a couple of housekeeping points, the slide presentation is on our website at www.victrexplc.com, under the Investors tab, and by clicking on Reports & Presentations you will find today’s material presented there. As we go through our presentation today, we’ll call out the slide number, as we were speaking to the messages from each and every one of them. So turning to Slide 3, our key message today is that we’re seeing improving end-markets all across the board, leading to first-half volumes of 5%, including a record February and March. And indeed April looked to have set a record as well. We also saw a good sequential recovery with first-half volumes up 39% versus the second half of 2020. And pleasingly, we’re also seeing significant pipeline milestones being achieved. And I’ll come back and pull out some of those when we look at our mega-programme, specifically. On Slide 4, speaking about COVID, we’re also seeing a solid recovery from the impact of COVID. I’d like to spend a moment reminding you that like any business, we’ve had to navigate COVID, with challenges for variety of our stakeholders, and we continue to do so. Firstly, our people continue to demonstrate high levels of resilience. I want to thank them for their continued impressive contribution and dedication. Over 75% of our global team remained home working, although we have signaled their intent to see a greater return to site for our UK team in July, subject to government guidelines. And obviously, our Chinese colleagues have been back on site for some time now. We took part in a COVID testing program for our business critical employees. And we continue to support a variety of communities globally, with time, PPE, and even with recycled PEEK materials and components for masks. For our customers, we continue to be a part of many critical supply chains. Remember that Chemicals was designated as an essential industry by the UK Government. And we are really pleased and proud to be able to report that our on-time and in full delivery towards our customers have been over 98% throughout this period. Richard will cover more on our financial position. But I do want to highlight a couple of points. Firstly, we did implement a cost savings program that will benefit us to the tune of around £10 million pounds this year and support our operating levels going forward. Secondly, our cost position has improved and we’re pleased to be back to pre-COVID dividend levels. On Slide 5, if we look at the highlights, we saw strong end markets in Electronics, in value added resellers and in Other Industrial, the latter principally are Manufacturing & Engineering business, where we have put additional sales resource in recent years to capture a range of manufacturing applications. I’m also pleased to say that we saw sequential improvement in Auto of 68% versus the second half of 2020. And in Energy, which remains challenging, but have seen improvement from the [12] [ph] levels of last year. Aerospace remains tough, with volumes down 40% year-on-year. But this end-market is stable now and we continue to see long-term opportunities. And indeed, we note recent OEM commentary suggesting some recovery all but quite variable. Medical has improved from the loss of 2020, but against a strong comparative in the first half of 2020 was down 16% in FY 2021. This also impacted our salesmen sales mix, and consequently, revenue was stable despite better volumes. Profits were offset by weaker mix, some continued effects from under-recovered overhead and bonus accruals, reflecting that the market anticipates modest growth on a full-year basis. It’s also pleasing to see sequential margin improvement. And Richard will cover the bridge on this shortly. Our growth potential remains undiminished for the future. And indeed, as we emerge from COVID, you’ll also see the opportunity for several programs to show potentially greater progress. Particular highlights in this update include some new businesses that we’re closing in on in the electronic vehicle space. And our PEEK Knee program now has 3 trial sites ongoing, and progress has been good, with a more detailed update to be presented in July, focused on the first implants. And in peak years, we now have an OEM ready to launch a further program in Europe, which is a significant milestone for us as well. I’ll come back and cover more of these opportunities later on. But I will now hand it over to Richard for the financial summary.

Richard Armitage: Thank you, Jakob. Good morning, everybody. So we’re starting on Chart 6, with an overview of the results for the year-ending, 31st of March. We’re pleased to report a solid recovery from the trough in the second half of last year, which has given us year-on-year sales volume growth of 5%. We have seen particularly strong growth in Electronics and General Industrial, whilst Automotive volumes were in line with what have been a good performance for us last year. There was also a good rebound in the value-added resellers, albeit that this may reflect a degree of supply chain restocking. Nonetheless, we feel we have returned to pre-COVID levels of trading overall. Aerospace, Energy and Medical remains subdued as a consequence of market conditions, but have all shown some improvement from the second half of last year. Reported revenue was flat year-on-year, but grew by 2% on a constant currency basis to £150.9 million reflecting [early billings] [ph]. Gross profit declined by 6% to £81.4 million pounds or by 3% on a constant currency basis, reflecting a declining gross margin of 340 basis points to 53.9%. As well as the weakness in medical sales, margin has been impacted by currency, and as expected, by another recovery of manufacturing costs as we unwind our Brexit inventory. We did see a sequential improvement from 47.3% in the second half of FY 2020. Overheads was slightly below prior year, with underlying savings of £4 million offset by bonus accruals. Underlying profit before tax reduced by 10%. Our effective tax rate of 13.2% remains in line with our expected long run average, which has increased slightly to reflect the changes in UK corporation tax rates. We’ve continued to benefit from the lower rates available through the UK Patent Box scheme. Looking forward, we expect sales volumes to be slightly lower in the second half, reflecting the supply chain restocking we think has taken place in the first. We would expect a small incremental improvement in gross margin as production volumes pick up. But we do also expect overheads to be some £4 million to £5 million higher as a result of bonus accruals and a resumption of full business activity. Given our solid outlook, the Board is pleased to recommend an interim dividend of £0.1342. If we move to Chart 7, we can see the underlying year-on-year movements in profit before tax in more detail. We can see the effect of our Medical sales, where revenue was down 16%, offsetting the benefit of higher industrial sales where revenue grew by 3%. Overhead savings were offset by the bonus accrual and there was a small currency headwind. The main items call out is once again the under-recovery of fixed manufacturing costs, which was the principal cause of the decline in PBT. Comparing to the second half of FY 2020, our increase in sales volume of nearly 600 tonnes was partially fulfilled by consuming roughly 300 tonnes of finished goods inventory. Therefore, although manufacturing activity did start to pick up, we have only seen a partial reversal of the under-recovery so far. We do expect further improvements in the second half, but with production volumes for the year still likely to be roughly 20% below the FY 2019 levels. Moving on to pricing. Average selling price was £72 per kilo, some 5% or £4 per kilo lower than last year. Approximately one-third of this was due to currency and the balance was due to the mix effect of lower Medical sales and higher Industrial sales without underlying pricing remaining stable. Looking forward, we expect the recovery of Medical to be more gradual, and therefore, we don’t expect a material improvement in average selling price in the second half of this year. Gross margin declined from 57.3% to 53.9% year-on-year over 340 basis point decline under-recovery accounted for about two-thirds, whilst mix and currency accounted for the rest. As expected, we did see an improvement of 660 basis points when compared with the second half of last year. This was principally driven by an improvement in the under-recovery of fixed costs, combined with the benefits of cost savings resulting from our restructuring announced last year. Looking forward, we expect a further small sequential improvement in the second half, assuming we start to see a recovery in Medical sales in the fourth quarter. Moving on to Chart 9. We’re again showing a chart that is intended to show how gross margin was impacted by market conditions last year, and how it is starting to recover this year. The first part of the chart is the same as we showed in December, with gross margin of 60% in FY 2019 declining to 47.3% in the second half of FY 2020. The principal causes were under absorption of overheads, inventory provisions and mix as previously explained. During this time, we can then see some improvements in mix with Medical sales coming to show some sequential improvement, but we lean in below the first half of last year. Roughly half of our £10 million of annualized cost savings affected manufacturing costs, the benefits of which the gross margin we can also see. The biggest effect, though, has been a partial reversal in the under-recovery of fixed manufacturing costs. Looking forward, we do expect further improvements with Medical sales are expected to recover once elective procedures restarting full and production volumes recover to pre-COVID levels. The timing of these changes is uncertain, which is why we’re only expecting a limited further improvements in gross margin in our second half of this year. Moving on to Chart 10. I’ve again shown the treatments of currency on the face of the P&L in line with IFRS 9. As before the individual line items are recorded as a weighted average spot rate then the gain or loss on forward contracts is shown as a separate line item within gross profit. The loss on forward contract showed a £1.7 million improvement versus prior year. However, a slight strengthening in sterling from US$1.27 to US$1.31 and from €1.12 to €1.14 resulted in an overall currency headwind of £2.6 million in line with our expectations. Our expectation for FY 2021 is for a further headwind in the second half to give an impact of approximately £3 million to £4 million for the year as a whole. We do at this point also wants to note that the potential for further significant currency headwinds as we move into FY 2022. We are 75% covered for the first half with an average effective rate for the US$1.37 and €1.14. Sterling remains at these levels than we expect the headwind for the year to be on the order of £10 million. I want to touch briefly on inventory. So as plans we’ve moved quickly to unwind our Brexit inventory. We reduced raw materials by about £7 million and finished goods by 300 tonnes and £10 million in the first half. This has contributed to a substantial working capital improvement. We do currently plan to deliver a further improvement in inventory over time. However, we have noted recent bottlenecks in global supply chains, which may lead us to increase raw material inventories, so this will between now and year end as a proportion. We would, therefore, expect year-end inventory to be roughly in line with or maybe slightly below where it was the half year. We remind to note that our Brexit inventory served its purpose in supporting our customers and their supply chains. And we have so far avoided any impact from other supply challenges. Our customer service has been in excess of 98% for the year-to-date as a result, apart from some minor transactional matters that still need to be resolved. We have no outstanding Brexit related concerns and we now consider the immediate challenges from Brexit closed. Moving on to our capital investments, I’m pleased to report that our China joint venture is still progressing to plan. Building and civil work is nearing completion and we are preparing for installation of equipments and services. The commercial opportunity in China continues to strengthen, our business there remain stable through 2020. And we are returned quickly to double-digit growth this year with our range of opportunities is expanding. We do expect the cost of the project to increase, as we are still having to rely on local engineering resource during the period of COVID disruption. We have also noticed significant inflation emerging in locally sourced materials. In addition, we’re making a number of investments in commercially driven projects in support of our customers. And we expect our capital expenditure this year, to be of the order of £50 million as a consequence. Around two-thirds of them will be expended in China. Finally, we are now making preparations to restart our debottlenecking program in the UK, and we’ll see more on this at the end of the year. Reporting this project during the last year has given us an opportunity to re-phase the project by implementing it in a number of tranches over 3 years, whilst also releasing capacity via a number of non-capital related improvement projects. The end results in terms of capacity evolution will be the same, but with a smoother capital expenditure profile that will be managed within the maintenance capital forecast for each year. Finally, closing on cash, we’re pleased to report another good cash performance in the operating cash conversion of 96%, despite some relatively high capital expenditure, which was in line with expectations at £16.5 million. Our working capital improvement of £4.2 million comprised an inventory reduction of £17.1 million offset by a net movement in receivables and payables of £12.9 million driven by increased activity. There were no changes to underlying payment terms. Our tax outflow was low at £0.9 million, no UK tax was paid in the first half due to overpayments made in FY 2020. As a reminder, we had made 6 quarterly payments in FY 2020 as a consequence of changes to HMRC payment arrangements. I will also note here that the proposed change to the UK corporation tax rate [indiscernible] will lead to a one-off deferred tax charge in the second half of approximately £6.3 million, which will increase the effective tax rate for FY 2021 by 7 to 8 percentage points and have a corresponding impact on an adjusted EPS. We have reported a cash receipt of £3.9 million of [acquisitions] [ph]. This is simply a capital contribution from our JV partner in China. Net cash at the end of the period was £79.6 million. It should be noted that this includes £16.6 million ring-fenced in our China JV, which leaves £63 million available to the wider group. We would expect our year-end cash balance to be in the region of £80 million to £85 million, but with some uncertainty remaining over the timing of capital outflow. Thank you. And I will now hand back to you Jakob.

Jakob Sigurdsson: Thank you, Richard, and turning now to Industrial update on Slide 15. On automotive, we did see good growth in new applications and volumes are only down 4% due to a strong prior year. Volumes were up 68% against the second half of 2020. And remember that in the prior year we saw some benefits on the PFOA ban in Asia, which contributed to a strong comparison this year around. Our PEEK play continues to have a good opportunity in traditional platforms and increasingly in electric vehicles as well, not just through lightweighting, but also due to durability, faster processing of materials and good thermal and electrical resistance. We have seen some minor impacts on the Semicon shortage for Auto, but this hasn’t detracted our business in this end market, and momentum still remains strong. In Aerospace, year-on-year down 40%, but some improvements since the trough levels, if you look at the OEM forecast build rates over the long term, however, Airbus as an example still forecasts around 36,000 new or replacement models by 2038, so only a 1% total reduction from the estimate pre-COVID levels. We do not, however, that this end market remains challenging in the short-term. 2023-2024 is the expected date for air travel to return to pre-COVID levels, of the long haul is expected to be the slowest one to recover. If we think about Victrex’s exposure, we do have exposure across both major OEMs and across platforms

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Charlie Webb from Morgan Stanley. Please go ahead.

Charlie Webb: Good morning, gentlemen. Thank you very much for the presentation. And thanks for taking the time for some questions. Maybe just 2 for me, just first on the outlook, just perhaps digging a little bit deeper, I mean, it sounds like sequentially everything is actually – if anything, perhaps accelerating, the strong April, strong May. Yet you’re going to reserve a more cautious view. So perhaps you can just help us understand what the potential of – what is potential upside? What kind of magnitude are we talking about there? And alternatively, perhaps, you could say in H1, what you thought was the contribution from those kind of stocking effects at a kind of sales PBT level? I guess, either way, that kind of helps us to triangulate what kind of upside we’re looking at for the second half, the potential upside – sorry, and therefore, the full year? So just understanding that. And then, what would give you reason to be more cautious, as in what markets do you think have overheated or have had lots of stocking effects that that might come off, because it sounds like it’s progressing well. And then, just second question on EV. Obviously, you brought it forward on your kind of bubble charts in terms of a bigger opportunity. Can you just remind us based on the business you’re winning, rather than probably the total opportunity, but the business that you’re winning, how much can more PEEK or not is in an EV versus an ICE today, just in terms of the platforms and opportunities you have one, when you look at like-for-like there? That’d be very helpful.

Richard Armitage: Morning, Charlie. Yeah, so just on the first point, this question of restocking is an interesting one. I mean, we think that broadly supply chains are probably actually still relatively low in inventory. But there is little evidence that in some of the sales growth that we’ve seen in the first half, particularly into the value-added resellers, there could be a little bit of restocking going on. So our expectation is that the second half will be a little lower. I think maybe about 100 tonnes, something like that. But I have to stress; we don’t have great visibility through those channels. So that’s a real estimate, if that helps. But at the moment, that’s the way we’re viewing it. What would we need to see change to adopt more confidence? I think, firstly, in terms of Medical, we would need to see elective surgeries picking up pretty firmly. And at the moment, outside of Asia there isn’t a lot of evidence of that, so that’s one indicator. And then, I suppose, an ongoing general steady improvement in performance, and particularly, perhaps in Auto signs that the chip shortage is not impacting us, it’s those kind of signals, it’s not ours.

Charlie Webb: Yeah, maybe just one follow-up. I mean, 100 tonne difference second half versus first half, yes, I guess, kind of implied in the guidance is somewhat more meaningful step down in PBT H2 versus H1. And, I guess, seasonally, second half is normally stronger than first half, so just help me triangulate. What are we missing that kind of leads you to hold that more conservative view currently? So, I don’t mean depress it, it just seems like – it seems, I’m just trying to get what’s the most realistic view is of the full year given where things are today, the 2 months you’ve had, and that what you see, I mean, it does seem like a big sequential step down implied…

Richard Armitage: Yeah. I mean, firstly, there’s that volume point, which is our margins is significant. I think, secondly, I did point to overheads. So we’re starting – we run [the] [ph] for a year now. And we got to restart or indeed add further increases to some investments in growth activities, travel and other such activities are going to pick up. So we’re anticipating an increase in overheads, half on half, covering all that of the order of £45 million. And I think that also production volumes, whilst they are ticking up are still going to weigh on gross margin in the second half. So I think it’s those things that they’re driving the caution. Consensus was at about £81 million, it’s moving a little higher. We’re comfortable with that. But nonetheless, because of those reasons I cited we remain a little cautious about the second half.

Charlie Webb: Okay, that’s helpful. Thank you.

Jakob Sigurdsson: And, Charlie, if – good morning, Charlie. I’ll take the one on electric vehicles. I think, we’re looking at opportunities across really you would say sort of 5 main pillars, if you wish. So it will be associated with the e-motors. It will be associated with battery applications, thermal management broadly in the electric vehicle space, power electronics and then sort of applications that will translate over from [the Is] [ph], namely, things that are associated with the chassis and braking systems as an example. So it’s across these 5 pillars, if you will. We’ve used as a guiding figure that, our penetration in cars, passenger cars today is probably around 9 grams per car roughly. We see potential to increasing that to 12 grams, by expanding further in existing applications with more adaptation of Gears. That opportunity grows to around 20 grams on average per car, porous. And I think we’re more and more convinced, the more data points that we see. And when we look at the set of opportunities across the 5 pillars that I mentioned that the opportunity in the EV world is getting somewhere close to 100 grams per car. And particularly looking to trends right now that are leading to a more demanding situation, where higher voltage as an example is increasingly being sought after.

Charlie Webb: That’s helpful. Are these applications pure PEEK applications or are they kind of composite? Just I got to understand that.

Jakob Sigurdsson: These applications that I referred to are all sort of pure PEEK applications, not composites.

Charlie Webb: Okay, very helpful. Thank you.

Jakob Sigurdsson: You’re welcome.

Operator: And the next question comes from the line of Alex Stewart from Barclays. Please go ahead.

Alex Stewart: Hi, there. Good morning. Hopefully quite simple questions, clarifying some points in your release. You said in the first half, the bonus impact on unallocated costs was offset by the cost savings. I think I read that correctly. And then you said that the bonus element was £4 million pounds in the first-half, which implies that the cost savings was £4 million pounds on unallocated costs. And you talked about £5 million pounds in gross margin here. Does that mean you’re going to hit your £10 million pound run rate in cost savings this year? But if I’ve got that wrong, please do correct me. And then, secondly, you said you saw currency gain in the gross margin in Medical in the first half? Could you just clarify what you mean by that and possibly the impact of it? I know there were some distortions at the end of last year too in Medical. And finally, your guidance on ASP, you’re talking about fiscal 2021 being modestly lower than fiscal 2020. So let’s say, for argument’s sake, £76 pounds a kilo, your first half number was £72. So are we looking at kind of around £80 to the second half, trying to just get your view on whether my math and conclusion is correct? And following on from that, my assumption is that the majority of that very significant sequential increases, just be returned Medical. Is that all aligned with what you’re thinking? Thanks a lot.

Richard Armitage: Hi, Alex. Your line was breaking up our side. Yes, I’m going to try and answer the questions, but tell me if I missed something. So bonus offset by cost savings. So we did indicate about £4 million in bonus accrual in the first half. It’s likely to be roughly the same in the second. So that’s one point. In terms of run rate of savings, we will achieve £10 million in terms of underlying labor-related savings this year. About half of that is in manufacturing. So it goes into gross margin. Unfortunately, it gets buried by the under-recovery. The other half is in overheads. So we’re definitely going to achieve that. I guess, you could say the benefit of that is offset by the bonus accrual and buried in other movements. But nonetheless, that saving is there. I think on selling price. So we I think are expecting to see a slight improvement in average selling price in the second half as Medical revenue is expected to pick up and therefore we get the mixed benefit. But I wasn’t quite sure how you got to a figure of something like £80. If we were £72 in the first half, you could assume we’re slightly better than that in the second half, maybe we get to £73 or thereabouts the year as a whole.

Alex Stewart: Okay, sorry, just to clarify on that, you said in your statement that full year ASP will be modestly lower than FY 2020. So maybe my modestly lower is slightly different to your modestly lower, because if you did £76 per kilo in fiscal 2020, I get what you’re saying, is that actually fiscal 2021 will be more like kind of £73, £74 pounds a kilo rather than…

Richard Armitage: Correct.

Alex Stewart: Is that the conclusion?

Richard Armitage: Yeah. That’s it, Alex, I think.

Alex Stewart: Okay, fantastic. And then, just sorry, just to clarify on that bonus point, so if you’re going to do £10 million by the end of the year and £5 million of that is in gross profit, then it obviously implies £5 million is in the unallocated portion. But the statement implies you’ve already done £4 million in the first half in the unallocated line, the sort of – the corporate cost line. So does that mean you’re going to get no incremental benefit in the second half? Or are you actually going to overshoot the £10 million? I can’t quite get those numbers to add up.

Richard Armitage: No, I can see your confusion I think, Alex. So the total bonus accrual in the first half was £4 million. Total savings from our savings program was just over £4 million, but part of that sits within gross margin.

Alex Stewart: Right, okay, that makes sense. Thanks.

Operator: And the next question comes from the line of Andrew Stott from UBS. Please go ahead.

Andrew Stott: Yes, good morning, everybody. Thanks for taking my questions. Can I start with future capacity? Two different questions here. Jakob, I think I heard you say the costs in China are going up. So I wanted to explore that, if you could spell out specifically why, and if you can scale what that means for CapEx and OPEX, relative to previous guidance? Second question on this topic was the UK. Still, the debottleneck is still imposed as per the release. What do you need to see to come back to that decision? How close are we to seeing that actually reverse? So I carry on, I’ve got 2 more. I do want to take those first.

Jakob Sigurdsson: Oh, ahead, Andrew.

Andrew Stott: I’ll go ahead. Okay, second one was Magma. Maybe I’m wrong. But is Magma being pushed back, because I had in my notes that you’re expecting a decision by the end of this calendar year. And I think you’re now saying 2022. So just want to check whether I was wrong in my note taking or not. And then, is there any chance you can scale the EV contract for us? Obviously, the one you’re close to signing? Thank you.

Richard Armitage: Thanks, Andrew. I’ll take the first one. So there are 2 inflationary impacts on the capital cost in China. The first, as we’ve noted, the last reporting period is the fact that we are working remotely. We’ve had to recruit quite a lot of local engineering resource. So that has an inflationary impact. And then what’s emerging is some fairly rapid inflation in commodities, particularly steel. Now, we’re working through that right now. So I would prefer not to get into the specifics of how much of that might cost us, because we’re in the middle of a negotiation. But we are happy with is that our guidance for capital in total for this year will be of the order of £50 million. That’s a little higher than it was, because I think previously we’re seeing something in the range of £40 million to £50 million. But really, we’re just coming out at the top end of that range.

Andrew Stott: So just to follow-up on that, there might be some upside risk to CapEx guidance beyond this year, is that the inference?

Richard Armitage: Yes, that’s probably a reasonable assumption. We were still working through what plans we may have the next year, I can probably see that next year would be another year or more moderately high CapEx probably set in the £40 million to £50 million kind of range. So you’re right to anticipate that some of that fallout next year.

Andrew Stott: Okay. Thank you.

Jakob Sigurdsson: And then, Andrew, on debottlenecking at Hillhouse, so Richard mentioned in his overview, we are still planning to undertake that, we’re going to do it in phases, however. So the overall, capital investment is about the same as indicated before, but instead of being consumed in a year, it’s likely to be spread out over 3 years. And it is a sensible thing for us to do along with other initiatives that are ongoing here to increase our capacity through incremental improvements and changes. And, given the growth rate that we’ve seen in the business over periods of highs and draws then you’ve seen this business growing at upper-single-digits over its entire history, you’ve got every reason to believe that we’ll continue to do so. And with mega-programmes starting to command volumes in years to come, then we feel it is a prudent thing to pursue at a relatively low cost per kilogram in terms of CapEx. So we’ll continue with the debottlenecking of PP1, spread it over 3 years as opposed to doing in a single year before, and we’ll be pursuing it with impacts that are starting to show in FY 2022. On the Magma site, Martin, I’ll hand that over to you.

Martin Court: Yeah, Andrew, so we’re making really good progress on the qualification work there with Technip really strong discussions going on with Petrobras. But clearly, the oil and gas industry went through a really tough time from a capital availability point of view in the middle of the COVID period. So Petrobras were keen to make sure they continue with the qualification work, even though there may be a slight delay in some of their deployments because of that, but they’re driving really hard with the qualification were working very closely in a 3-way relationship with Technip and Petrobras combined with Magma to drive that forward, and they still see it as the best solution for that problem.

Jakob Sigurdsson: And then, I think, your last one, Andrew was on the EV contract. And I’m just going to beat the [fifth] [ph] this time around, I don’t think we’re ready to comment any further on that at this stage. But, we’re incredibly pleased to see the validation that is embedded in the validation of our value proposition for this space, and it has sort of, obviously, further underpinned our belief in what we have to offer in these kinds of applications. But I’m sure you’ll hear more about it in due time, so bear with us, please.

Andrew Stott: Okay. And just to seem that, fingers crossed, you get that signed, I guess those revenues start to come through next year FY 2022?

Jakob Sigurdsson: We will start to see some elements of that starting to show up next year. Yes.

Andrew Stott: Yeah. Okay. Perfect. Thank you for taking the question.

Jakob Sigurdsson: You’re welcome.

Operator: And the next question comes from the line of Sebastian Bray from Berenberg Bank. Please go ahead.

Sebastian Bray: Hello, good morning. And thank you for taking my questions. I would have 2, please. The first is on pricing this on an underlying basis for Industrials, I think this has been the first half year for a while with a lot of stack, and where there was not any even moderate decline. Demand is pretty strong, could in the next few years prove the exception to the rule that prices are usually down 0.5% to 1% per year within Industrial PEEK applications? My second question is on the electric vehicles, I suspect, you’re not going to give much in the way of details about what these applications are. But more broadly, could you talk about the type of materials against which PEEK is competing for applications like slot liners and other EV specific uses, and the type of price points which the material is sitting out versus currently used solutions? Thank you.

Richard Armitage: Good morning, Sebastian. So I’m not entirely sure I particularly want to get into the business of predicting pricing. But I think as you noted and just to be clear, in the majority of our business underlying pricing tends to remain very stable. We can see a little bit of erosion from time-to-time in the Value Added Resellers. In the first half of this year, pricing is stable. There is very little movement at all, which is good. Looking forward, we would aim to continue with our approach of focusing on service to our customers, making sure we continue to bring them innovation, making sure we can continue to make the right returns. So I’m not sure we would be seeing any change to our approach, to our customers, because the consequences of what’s currently happening.

Jakob Sigurdsson: Martin, you want to step in.

Martin Court: Yeah, Sebastian, on EV, this is an ever changing picture in terms of the performance criteria. So the question was pretty tough to answer. So what I would say is that if you read over all the benefits that you see a PEEK in normal Industrial application, so things like high temperature, chemical resistance, and abrasion resistance, and ability to perform in tight spaces, and lightweight all of those things apply in the various elements of E-mobility. We continue to see the applications that we are being specified in evolve. And it’s really hard to give you a point on pricing or on specifics, because I think actually many of the e-machine builders and the e-vehicle builders are still working that out themselves, where things fit best. What I can say is, you can rely on the fact that the traditional principles, if PEEK fits there, it will fit on the basis of those very specific performance criteria.

Sebastian Bray: If I may push on this, when you pitch for work in slot line as a router electrical insulation, what are the types of materials that are currently sitting within those applications at the moment?

Jakob Sigurdsson: Well, if you think about, let’s take wire, for instance, then that’s broadly against enamel.

Sebastian Bray: That is helpful. Thank you.

Jakob Sigurdsson: Thank you.

Operator: And the next question comes from the line of Rob Hales from Morningstar. Please go ahead.

Rob Hales: Hi, good morning. Thanks for taking my question. In Medical, can you talk about the CMS and arthroscopy applications usually talk about Asia. So I’m wondering are those markets – what’s the state of those markets in the U.S. and Europe right now. Are they material? And are they still growth markets there? And then your comments on kind of recruitment and retention, I just wanting to do, we made some changes there. And I’m just wondering, what led to that decision, and it’s no longer based on profit growth. So again, what is the kind of the performance is based on now?

Jakob Sigurdsson: Martin, you want to add to the Medical question.

Martin Court: Yeah. So on CMS, then we have seen very strong performance in Asia over the last 18 months, really on the back of a study that I think we talked about previously, which showed that cognitive recovery was much better using PEEK rather than metaphor as the implant there. There is application on a broad base globally, but it is more prevalent in China.

Richard Armitage: I think, Rob, let me just pick up your point, I think, you referred recruitment and retention, I think you’re probably referring to our slight change to the employee bonus scheme. So what we’ve done here is that the old scheme was based purely on PBT growth, the – and was almost uncapped. Now there was a cap rate, but it was so high that actually in Europe, very strong PBT growth the bonus accrual could be very large. But the problem was that in a business that can be affected by market movements, then there were years when the bonus scheme would payout a significant bonus. There other years where there would be nothing paid out at all. And you’d only have to look at the history over the last 3 years to see how that has played out, and how that actually can be the most taking for our staff. So we simply moved to a more normal bonus scheme based around achievements of a budget in any given year with a range around that budget. And with a cap on the scheme at the higher end, I think, we able to saw the lower end. So that’s all really aimed at achieving a more consistent bonus payout over time for our employees. And it’s not aimed at reducing cost. It’s not a cost saving measure.

Rob Hales: Okay. Thank you very much.

Jakob Sigurdsson: You’re welcome.

Operator: The next question comes from the line of Rikin Patel from Exane BNP. Please go ahead.

Rikin Patel: Hi, all. Thanks for taking the questions. Just one on Gears. Firstly, what is the max revenue potential of your 4 existing contracts? And how many of the 20 development contracts that you have to commercialize in order to generate high-single-digit revenues or low-double-digit revenues? And then secondly, just the follow-up on Hillhouse, debottlenecking over there. How much of that incremental capacity, do you expect to be absorbed from the new volumes in your growth program? Thanks.

Jakob Sigurdsson: I think it’s difficult to pinpoint exactly what’s going to be consumed by the mega-programmes, but, if you look at the growth run rates in the business. And I think, we’re getting to a point right now, where we are looking at the nucleus, if you wish that we had at core business in 2018, that is suffered by the mini recession, particularly in Automotive and Electronics in 2019, we were recovering from that when COVID hit. But I think, right now, that nucleus is sort of starting to grow again, we have not last business from that time. We’ve increased our penetration into certain applications. So I think the nucleus that we’ve had in 2018 will be starting to grow, again at the rates that we saw sort of proceeding the recession in 2019 and 2020. So that’s point number 1. Then, the biggest volume demand for the mega-programmes in the near-term will be coming from Magma definitely, and then probably Aerospace and Gears after that. And then, out in 27, 28, from the structural parts programs that we currently have ongoing. Victrex has always had a history of investing ahead of demand, it is important for us to be able to keep up with spikes in demand that underlines the need for reliability towards our customer base, that very often relies on us as a single source supplier, and hence the emphasis that you’ve also seen throughout the COVID period, whereby we have delivered them above – around 98% on time and in full. And we’ve managed to do that also in the face of this quite substantial rise in demand over the recent months. So we do take our role criteria in that regard, and therefore are committed and convinced and comfortable with investing ahead of demand. I’ll hand it over to Martin for Gears to comment on.

Martin Court: Yeah. So on Gears, the projects that we have already commercialized, they’re obviously early adopters, so smaller type programs. So I would guess that we would say that there are less than a million those. But certainly programs in the pipeline have potential to be greater than £5 million. So pretty normal way of these things build were initially people put new technology into the market in a limited way, once it’s demonstrated, then are prepared to go for bigger and more significant programs. So in that pipeline, there are several opportunities which could bring really material sales.

Rikin Patel: Great. Thanks.

Jakob Sigurdsson: Thank you.

Operator: The next question comes from the line of Chetan Udeshi from JPMorgan. Please go ahead.

Chetan Udeshi: Yeah. Hi, thanks. Good morning. A couple of questions from my side. And first one was just on Electronics, just wanting to confirm there is nothing, which is like one-off product in that number, I think, from my memory, there was a couple of years back something like consumer device 50 tonnes or so which never recurred? Again, I’m just wanting to check nothing of that sort in the number that, it disappears, let’s say, in 12 months time? And the second question was just coming back to the Medical and it’s a 2-part question. First is, your commentary or maybe subdued recovery in elective surgery is a bit out of sync with what we hear from some of the other medical device companies more recently, where they have in actually a faster recovery. And, just looking at the Medical gross margin, it’s already back to the 88% level, even though the high value pieces do not recover. So does it mean that the medical products set across the board has that sort of same gross margin levels, even if the value or ASP is different across some of these different Medical applications?

Jakob Sigurdsson: Yeah. Thanks, Chetan. I will take the Electronics one, and then Martin will give you a market update on Medical, and Richard will take a margin question on Medical as well. On the Electronics side, it is a broad-based growth for us around the number of home appliances, and acoustics applications along with Semicon. So it’s a mixture of these 3 in a pretty healthy outcome for all of them. So we all know that Electronics have a relatively fast development cycle and a product life cycle as well. But I wouldn’t consider any of those as necessarily one-offs. But obviously, they’ll be subject to the fact that we’re always operating at a faster clock speed here than we are in other markets. But as relates to a definition of one-off, I wouldn’t say so. Richard, you want to take the Medical margin before Martin.

Richard Armitage: Yeah. Hi, Chetan. So this movement to Medical margin is actually a consequence of an unusual movement in the underlying currency dynamics. And so, I wouldn’t necessarily focus too heavy on it. So if you think about the fact that we cover forward for 12 months on a rolling basis, when we got into the second half of last year and Medical revenue reduced quite sharply as a consequence of COVID, we found ourselves over-hedged in U.S. dollars in relation to the Medical business. So – and we then came into this year, and the hedges unwound and were favorable hedges. Then there is a favorable impact on the Medical gross margin from the unwinding of those hedges. They now actually pretty much accounts for the increase. And it’s a one-off, because normally our hedging is reasonably accurate. And that one occurred because of the unusual circumstances around COVID in the second half of last year.

Jakob Sigurdsson: So, Chetan, on our outlook for Medical, we clearly said that over 50% of our business is in the U.S. And we remain cautious about that. We’ve been using a quite unusual way of looking at this, by looking at what people are searching from the point of view of procedures. And it’s something that’s quite interesting. When you look at the number of Google hits on an elective surgery, you can make some projections about how confident people are to subject themselves to elective surgery. And we found that to be quite helpful guide so far in terms of the way in which the U.S. market has recovered. So other people may be using different measures. And we’re certainly seeing China back to usual. And we’re obviously a bit cautious about what’s going to go on in Europe, given the way in which the coronavirus is affecting Europe at the moment. Clearly, with U.S. vaccination, you’d expect that the rates of elective surgery would recover. But we’re still not thinking that’s going to happen until the last calendar quarter.

Chetan Udeshi: Understood. Maybe if I can follow up with a slightly different question. Which was, Jakob, you mentioned the pipeline activities progressing. So given now that we are also in some sort of a macro recovery cycle, should we be seeing Victrex go closer to those numbers that you guys have talked about in terms of high-single-digit growth prospect in the business in terms of volumes? It’s clearly I think at some point one would argue that that optimism on pipeline has to come through in terms of numbers.

Jakob Sigurdsson: Yeah, I think, we will try to decipher what you said chapter here amongst ourselves. Yeah, I think, overall, there is every reason to believe that Victrex should be returning back to the rate at which it was prior to the 2019, 2020 recessions, if you will, where the company has historically shown the CAGR of between 8% and 9%, so upper-single-digits. And it will go on from here, I think, we have every reason to believe that there is a growth rate that should be expected from us.

Chetan Udeshi: Very good. Thank you.

Jakob Sigurdsson: Welcome. Thanks.

Operator: The next question comes from the line of Martin Evans from HSBC. Please go ahead.

Martin Evans: Thanks. Good morning. Just a quick question back on Medical and long-term non-Spine potential, you refer in the slides and also in the text to cardio and also specifically to one of your customers receiving approval. I think it said for an artificial heart. I mean, I appreciate this is presumably a very niche market, but maybe for Martin, could you give us a feel for PEEK’s involvement in the cardio market and the very long-term potential as you see it? Thanks.

Martin Court: Yeah, Martin. This is a very specific application where people who need heart replacements can be extended while they wait for a heart by having an external artificial heart. And when made of PEEK, it’s proving to be very successful. So, very early, the early clinical trials are showing that somebody can be kept waiting for a replacement for a heart for up to 18 months with this particular device. But as you say, it’s a pretty niche application. We are as Jakob said earlier, looking at broadening what we do in non-Spine. We still remain focused on Spine with the Porous project, of course. But there are other areas, I think, where we’ll see broader growth than in very specific cardio space, Martin.

Martin Evans: Interesting. Thanks very much.

Operator: And we have one more question from Alex Stewart from Barclays. Please go ahead.

Alex Stewart: Hi, now, I have something very quick. Can I just clarify, Jakob, that comment you made on midterm growth 7% to 8% or high-single-digit, were you talking about volume growth there? Is that your aspiration for volume growth over the midterm rather than EPS growth? Thank you.

Jakob Sigurdsson: Yes, that’s right, Alex.

Alex Stewart: Thanks very much.

Operator: And as there are no further questions, I’ll hand it back to the speakers for closing remarks.

Jakob Sigurdsson: So thanks, everybody, for your participation today on the questions. I will look forward to come back to you when we release our first quarter results in earlier July. Thanks everybody.

Operator: This concludes our conference call. Thank you all for attending. You may now disconnect your lines.