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Transcript : Victrex plc, 2022 Earnings Call, Dec 06, 2022

06/12/2022 | 10:00

Presenter Speech
Jakob Sigurdsson (Executives)

All right. So good morning, everybody, and welcome to Victrex's Full Year Results Presentation for 2022. Welcome also to those that are joining us on the call today. So firstly, some introductions. I'm Jakob Sigurdsson, CEO of Victrex. We also have our relatively new CFO, Ian Melling with us here today. And as you know, this is Ian's first outing as a CFO for Victrex, and we're really pleased to have him on Board. Also joined by Martin Court, our Commercial Officer -- Chief Commercial Officer; and Andrew Hanson, our Director of Investor Relations is also in the room.

Firstly, a couple of housekeeping advices. So the slide presentation is on our website at www.victrexplc.com under the Investors tab and by clicking on Reports and Presentation, you will find it there. And we'll make sure we call out the slide numbers when we are speaking today to aid your navigation through the presentation. Secondly, we will have a Q&A at the end. And I will open up the questions to those in attendance here first and then we'll take any questions from those on the call thereafter.

So, turning to Slide 3, I thought it would be useful to summarize our key messages for FY' 22. We're really pleased to have delivered a record revenue and record volumes in FY '22, with revenues up 11% to GBP 341 million and sales volume of 4,727 tonnes, so up 8%. I'd like to put this in the context of where our core business was in 2015, feels like ages ago, which was at the height of the large consumer electronics contract, meaning that we have now seen our core business grow from 3,200 tonnes approximately to over 4,700 tonnes this year, a near 50% increase, which represent a CAGR of around 6% over these 7 years, despite the impact of COVID and despite the fact that there is still quite a bit of unmet demand out there from pre-COVID times.

More importantly, as I said, we have a number of end markets, which are not fully recovered to COVID and are therefore yet to show up in these numbers. And I'm particularly thinking about aerospace, automotive and medical as 3 examples. Also interesting to note that we continue to further diversify our core business with new applications across both industrial and medical. For example, we're making some really good progress in applications for wind turbines in medical, we've seen advances into E-mobility as well in wire coatings.

And in medical, we see a very good progress in craniomaxillofacial applications and in emerging applications in cardio also, including in artificial heart. And this is really before we turn to the progress of our mega programs, which have seen a significant advancement during the year. So in summary, we're really pleased with our progress across the top line and most of our end markets. We know we have ongoing challenges from inflation with the impact the levels to the bottom line, but the growth opportunities for Victrex remains sizable and we're making really good progress on improving the bottom line in correlation with the great advances that we've seen both on volumes and revenues.

Moving to Slide 4. Before we cover the '22 highlights, just want to spend a minute on what we're doing on sustainability and ESG. I think it's fair to say that sustainability is integral to everything we do, and actually always has been that way at Victrex. It's a part of our purpose to enable transformational and sustainable solutions to our customers, it's a part of our business model as well. Remember that our sustainable products enable environmental and societal benefits through supporting both the CO2 reduction, energy efficiency, and patient outcomes.

So a brief word on FY' 22 sustainability highlights. So our sustainable product revenues are at 48% now and tracking towards 50%. Although I have to point out that this excludes the volumes that we sell through value-added resellers, because those are difficult to track still. We know that a good chunk of auto volumes go through VARs, some electronics too, particularly to semicon. So the actual number is probably quite a bit higher than this number would indicate.

In resource efficiency, this year we achieved a 100% renewable electricity for all our U.K. sites and at 97% globally. We also completed our Lifecycle Analysis and the initial Scope 3 emission projects. And the good news is that Victrex PEEK is indicatively lower on CO2 global warming potential than the industry average. We will have more details on this in our Annual Report that is due shortly after Christmas.

Finally, social responsibility is a key area for us, continue to see employee volunteering for various charity work. We will also support STEM activities and I'm pleased to say that our focus on diversity, equity and inclusion is progressing well with our female in leadership roles increasing this year and our target areas 40% by 2030.

Turning to Slide 5. I signaled that our sustainable products are 48% of revenues. At the current time, we do exclude oil and gas and value-added resellers from this definition. Given the emphasis that our value-added resellers are placing on ESG these days, I'm confident that we can get added granularity on what fraction of what we sell to them actually ends up in sustainable applications. So as I've said before, this number is likely to be significantly larger than this number that we're presenting today would indicate.

We include auto, aero, medical and some energy in industrial applications. We also include some products within electronics where we have a quantifiable energy benefit associated with the use of PEEK in certain applications. As you can see from the slide, some really good examples. Headlines, for example, we say 3x more CO2 annually in aerospace through our sales there, and replacing metal compared to what we produce in our own entire operations in medical raw materials supporting better patient outcome and therefore social benefit. One example is the brain study done using PEEK in craniomaxillofacial applications rather than metal as an example. So really strong and broad portfolio of sustainable products.

Now moving on to Slide 6, looking at FY' 22 highlights. Ian will cover the financial details shortly. But overall, we've seen really good progress across the core business in our mega programs. We also saw a much better average selling price in the second half as price increases started to kick in more materially. And we have broadened our range of options for pricing as well. Now including surcharges as a part of a mechanism to recover what has been an unprecedented magnitude and speed of input cost rises.

We are well aware of the macroeconomic challenges from inflation and how that has held back PBT and gross margins. But importantly, we have seen better pricing and we've also seen much better operating efficiency. In our mega programs, I will cover the detail later, but some very, very notable progress. Remember, our mega programs have all proven that they are technically feasible and we're building a commercial traction now. So they are already well on the journey to greater revenues.

Sales from new products, which includes mega programs and new polymer grades was 6% of sales versus or GBP 19 million this year versus 4% and GBP 12 million last year. So good progress. Really notable progress in medical with trauma and our In2Bones partnership, which I will speak a little bit about later.

And with knee, we have 30 patients implanted now, 12 of them passed the 1-year mark with no intervention, and really happy to talk about and announce a major development collaboration with Aesculap, which is one of the top 5 knee players in the world, where we can look forward towards commercialization of a product line with them.

On the industrial side, we saw really good progress in Gears and in E-mobility, particularly around wire coatings. And in aerospace, the first large structural PEEK parts are now real and starting to merge the demonstrator parts for the Airbus Clean Sky 2 program. These are being exhibited as prototypes and the loan offer the potential for 10x PEEK content increase compared to what we have in aerospace today. Really a fruit of a lot of hard work for many, many years and starting to show up in large structural parts that we think will make a significant contribution for our business going forward.

And finally on Magma, the bid programs have now been submitted and TechnipFMC is awaiting the outcome from that, and are actually actively working on scaling up the production facilities in Brazil right now. And hopefully, we'll have more news flow through TechnipFMC in the first quarter of next year.

I'll now hand it over to Ian, but I'd also like to say that none of the progress we've made would have been possible without us maintaining a strong financial position with high levels of cash generation, which also allows us to invest for growth, like in China, as an example or increasingly now in medical as you've heard us talk about in recent times. And on top of that, also being able to pay dividends to our shareholders.

Ian, over to you.

Presenter Speech
Ian Melling (Executives)

Good morning, everyone. And -- firstly, I just wanted to say how pleased I am to be here with Victrex today, having been here for nearly 6 months, I can say that what I saw from the outside looking in is true within the business. As you'd expect from the CFO, I must start with a strong financial position, but it's also important to note the significant opportunities, culture of innovation and growing ESG credentials through our sustainable products. Clearly, like many companies, we also have our own short-term challenges, which we are managing. I look forward to meeting you all and keeping you updated on our progress.

Starting with Slide 8, in our P&L an overview of our results for FY '22. As Jakob said, we are pleased to report record revenue and volume. At the revenue level, we reported full year revenues of GBP 341 million, up 11% on the prior year with revenue up 10% on a constant currency basis. We saw some benefits on revenue from currency during the second half as sterling weakened.

We saw particularly strong growth in value-added resellers Electronics and Energy & Industrial, each of these saw double-digit growth during the year. We had a record quarter during Q3, 646 tonnes. We did see some sequential softening in our final quarter, primarily a normalization within VARs. Although we note that our Q4 is typically seasonally weaker than Q2 and Q3. As we noted in our outlook statement, several end markets are still to fully recover from the effects of the pandemic and continue to offer good growth opportunities even if the near-term macro economic outlook is uncertain.

Gross profit increased by 6% to GBP 174.5 million or by 10% on a constant currency basis. As we measure the future success of our Polymer & Parts strategy, the focus on volume will diminish in favor of gross profit and driving value from our solutions, whilst continuing to measure return on capital. Our reported gross profit is stated after the impact of currency hedging where we reported a net loss of GBP 2.8 million compared to a GBP 4.9 million gain in FY '21.

The higher cost of manufacturing continues to impact us, and consequently hit our gross margin, which we signaled will be lower in the second half and was 51.2% on a full year basis with currency and sales mix also impacting us here. We also show here FX hedge adjusted gross margin, a measure which treats the hedging is within revenue rather than COGS in determining the margin and which was 51.6% this year. I'll come back to this later.

Overheads excluding exceptional items were up 7% on the prior year with innovation and growth investment driving this. As previously communicated, we also had to build up overhead to support the preparation and commissioning for our new PEEK manufacturing plant in China, which was approximately GBP 3 million over the course of the year. This was offset by GBP 3.4 million lower bonus accrual. Our underlying profit before tax increased by 4% to GBP 95.6 million, or by 12% on a constant currency basis.

Reported PBT was down 5% to GBP 87.7 million, which reflects the GBP 7.9 million exceptional item incurred for our ERP system. This investment is progressing to plan. We expect the total investment for our ERP system to be in the range of GBP 15 million to GBP 20 million with completion in FY '24. As signaled previously, Software-as-a-Service accounting rules mean we have to treat this as an expense rather than it being capitalized.

Our effective tax rate of 13.9% was materially lower than FY '21's rate of 21.3%, which is primarily as a result of the restatement of deferred tax balances in the prior year. Our guidance for the effective tax rate remains in line with our previous communicated long run average range of 12% to 15%, which increased slightly from the previous 10% to 13%, reflecting the changes in U.K. corporation tax rates. We also continue to benefit from the lower rates available through the U.K. government's Patent Box scheme with the patents in place since 2017.

Earnings per share increased by 14% to 95p per share on an underlying basis, and by 4% to 87.6p per share on a reported basis. Finally, a brief word on our dividend. Whilst we see an uncertain macroeconomic outlook, we've seen a steady start to the year as noted in our outlook statement. The Board is therefore pleased to recommend a final dividend of 46.14p per share, giving total dividends of 59.56p per share for the year. It should be noted that the FY '21 dividend number shown on the slide reflects a 50p per share special dividend.

Turning to Slide 9, and the underlying year-on-year profit before tax movements. We can see the effect of strong volume growth and the recovery in medical as elective surgeries returned in greater numbers. As I will come to on a later slide, sales mix was slightly weaker year-on-year, which impacted margin. This is mainly the effect of VAR and the other industrial end markets driving growth. We should note that within medical we saw stronger growth in non-spine, which is now 50% of medical revenues.

We have a significant range of growth opportunities as we have diversified the medical business over recent years with the mix now shifting towards non-spine. Although we are making good progress in spine areas such as Porous PEEK, which offers us an attractive opportunity. The first round of price increases kicked in more materially within the second half to support inflation recovery with a benefit in the year of GBP 6.5 million, the large majority of which was in the second half. We expect a full annualization of this benefits in FY '23, along with further price increases in part in response to the further increased energy and raw material costs. We have broadened the range of options for price increases, including surcharge pricing and we have begun to implement these.

2 remaining key items to flag are operating efficiency and inflation. Under recovery of a fixed manufacturing costs was the principal cause of the decline in PBT during FY 2020, and we have been seeing improvement since. Remember that in the prior year we unwound a significant amount of inventory built up for Brexit meaning our production volume of around 3,500 tonnes significantly liked our sales. In FY '22, we saw a GBP 10 million improvement in unrecovered fixed costs through much better operating efficiency with the production volume of around 4,600 tonnes much closer to sales volume. We do have some remaining under recovered fixed costs, primarily in our downstream assets, manufacturing product forms or parts, and we're tackling those.

Energy and raw material inflation was in line with our expectations at GBP 18.3 million in the profit and loss account with approximately 60% of this being driven by U.K. energy costs, which, as most commentators have noted, grew amongst the fastest in Europe. For FY '23, as we noted in our announcement today, we are anticipating a further year-on-year cost inflation impact of potentially up to GBP 20 million between raw materials and utilities, even with the governments -- the U.K. government's price cap for 6 months. As I mentioned, we are already progressing a further wave of price increases to support recovery.

I've already touched on startup costs to support our China investments, which will be higher in FY '23, with investment for growth being in support of mega programs and innovation. As Jakob will cover later, we're also seeking to prioritize investments in our medical business with the intention of this becoming a larger proportion of our revenues over the longer term. Finally, we saw a GBP 6.7 million headwind from currency at the underlying PBT level.

Moving on to Slide 10, pricing, our full year average selling price was GBP 72 per kilogram, some 3% better than last year as we saw price increases kicking in during the second half and benefited from currency on revenue. In the second half, our ASP was GBP 73 per kilogram, up 4% sequentially from H1 and also 4% versus H2 2021. Again, just to be clear, our sales mix was slightly weaker over the year with VAR driving growth.

A quick word on ASP guidance for FY '23, with an anticipated normalization within VARs, but further improvement likely in medical, as well as the indicators we are seeing for the aerospace and market and build rate increases, we do see the opportunity for ASP to improve close to GBP 80 per kilogram reflecting mix, price increases and the benefit of currency, even if volumes do not progress much versus FY '22.

Turning to gross margin, gross margin declined from 54% in FY '21 to 51.2% for FY '22, a 280 basis points movement. FX hedge-adjusted gross margin, which treats the hedging impact within revenue showed a more modest decline from 53.1% to 51.6%, a 150 basis point movement. I'll cover the major movements on the next slide, but the key message here is how the unprecedented energy and raw material inflation impact -- inflation impacted our cost of manufacture. Whilst we've been recovering that through price increases and efficiency, it's been with a lag effect reflecting the timing of contract renewals.

Our intention remains to recover our gross margin percentage in both the mid-50s, once energy and raw material inflation starts to stabilize. For FY '23 specifically, margin will remain challenged. With shutdown work for our U.K. assets improvement program, we won't see the same asset utilization improvement we saw in FY '22, although mix and currency should be supportive, but a higher cost of manufacture will remain a challenge in the short term.

Moving to Slide 11, on the gross margin bridge, including the effect of currency. This chart is intended to show how gross margin was impacted by market conditions despite progress on price and operating efficiency. In FY '21, the principal drivers on margin were under-absorption of overheads, inventory provisions and mix, as previously explained. Although, sales mix was softer in FY '22, we saw a big improvement in the under recovery of fixed costs this year, which benefited us by 780 basis points. Price increases helped improve gross margin by 450 basis points. Mix was slightly softer, as I've previously explained, but unfortunately, the biggest impact on our gross margin was cost inflation equating to 10 percentage points or 1,000 basis points.

This means that improvement in our gross margin from efficiency and price was held back by energy and raw material inflation. We're making progress on inflation recovery. As I signaled earlier, margin will remain challenged in FY '23. But we do see an opportunity to improve gross margin over the medium term based on operating efficiency, inflation recovery and mix, once energy and raw material prices start to stabilize.

On Slide 12, we cover currency. The impact of currency hedging is shown on the face of the P&L in line with IFRS 9, note that the offsetting currency impacts on underlying trading are embedded in the other lines, most significantly revenue. We saw a net GBP 7 million headwind at the PBT level during FY '22. This was largely the impact of the strengthening of sterling in the prior year.

The loss on forward contracts was GBP 2.8 million compared to a GBP 4.9 million gain in FY '21. As we all know, sterling depreciated against the U.S. dollar quite materially during the second half with the year end rate at [ $1.1 ], our effective rate was [ $1.38 ] for FY '22 including the effects of hedging. Against the euro, the effective rate was [ $1.14 ] unchanged from FY '21. If we look forward into FY '23 given the depreciation of sterling and the current effective rates of around [ $1.27 ] our guidance at this stage is for a currency tailwind of approximately GBP 4 million to GBP 6 million at the PBT level. Remember, we are largely hedged for FY '23, so any change to this will be limited. We're starting to hedge FY '24, and we'll update as we go through the year on the currency implications, which at current rates would imply a modest tailwind.

Moving to Slide 13 and CapEx. Total cash CapEx was GBP 45.5 million, slightly ahead of FY '21. Beyond maintenance CapEx, our largest slug was in support of our China investments in assets and capability. As you can see on the slide, we made good progress in getting to mechanical completion by the end of FY '22, and this new facility in Panjin is in commissioning with the aim of commercial production later in 2023.

I'd also like to mention safety performance as we saw over 700,000 hours worked during FY '22, with no recordable injuries. And in fact, we've seen 1.7 million hours worked on the project to date. Again, with no recordable injuries. For FY '23, with our investments in China still to complete, in addition to our U.K. assets improvement CapEx, we anticipate a similar level of capital expenditure.

Slide 15, on cash, we're pleased to report another solid cash performance, although the higher capital expenditure, higher inventory and receivables and payments of the FY '21 special dividend and the free cash flow was materially lower than the prior year at GBP 34.5 million. Operating cash conversion was 49% as a result of the higher working capital and CapEx, but this follows 2 years of 100% conversion. We are focused on maintaining Victrex's excellent record of cash generation.

Our working capital movement of GBP 27.5 million comprising an inventory increase of GBP 13.4 million from recovery of inventory from lower levels during the pandemic, and the higher production costs driven by inflation and an increase in receivables of GBP 16.9 million from stronger sales performance in FY '22 offset by an increase in payables of GBP 2.8 million.

Our net tax outflow was GBP 2 million higher at GBP 10.6 million in total. We received the proceeds of TechnipFMC's acquisition of Magma, which we were a shareholder in at GBP 4.5 million. Total dividends paid of GBP 95.2 million reflects both the regular and FY '21 special dividend of 50p per share. This was materially higher than the GBP 51.6 million of dividends paid in the prior year.

As previously signaled, we did take on some bank borrowings in China to support investment in our assets there with GBP 14.5 million drawn down in the year. This gave a closing cash position of GBP 68.8 million which includes GBP 2.8 million of cash ring-fenced as part of our China investments. Excluding the cash for China, total available cash was GBP 66 million.

Whilst I've touched on working capital, it's worth flagging the impact of higher energy costs on inventory during the year, and this will likely also be the case in FY '23. We will need to add some inventory to support us as we shut down a proportion of our polymer assets for the U.K. asset improvement program. This means together with rebuilding raw material inventory to comfortable levels, total inventory could be above GBP 100 million in the coming year.

Moving to Slide 16. Before I close my section, I'd like to briefly flag that we intend to engage with shareholders on capital allocation, specifically around special dividends and buybacks. To reiterate, Victrex's priority is to invest to support growth that can be in capacity and capability and innovation. We've benefited significantly from previous investments particularly and how they have supported our mega programs. As signaled previously, we do expect normalized CapEx after FY '23, which will remain higher to be slightly above historical levels at around 8% to 10% of sales. This incorporates our ESG plans and potential cost to transition to renewable energy.

In terms of excess cash, we will assess the options for both special dividends and buybacks whilst retaining flexibility following some shareholder interests through FY '22. We've historically paid special dividends when we have no other use of that cash at a minimum 50p pence per share level. We think that level is still reasonable to make a special dividend special. We will also consider buybacks and we do already have shareholder approval to buy back up to 10% of our shares by our AGM resolutions.

Recent feedback from shareholders supports buybacks, particularly reflecting valuation at recent levels. These may well be smaller buybacks to ensure we retain flexibility. For example, a buyback could be utilized with less cash than that for 50p per share special dividend. So we will take time to engage with our proposals. In summary, the key message is that we will continue to retain flexibility to ensure that investment for growth can remain the priority as we see CapEx nudge down in future years following the recent major capacity expansions.

With that, thank you, and I'll hand back to Jakob.

Presenter Speech
Jakob Sigurdsson (Executives)

Thank you, Ian. So we now move to Slide 17. Turning to our business performance in more detail. Firstly on medical, happy to report our strong growth performance here with revenue up 14% and growth in all regions, and Asia up 40%, EU 11% and U.S. 6%. If you go back a few years, the question was always, well, we could diversify enough into our medical business? We've had then opportunities both in spine and non-spine. And I think we are now proving that we can do that and that's really I think obvious in the number. Spine itself was up 2% year-on-year, but non-spine grew 28%. And non-spine is now half of our medical revenues.

Remember that this year we also faced the impact of the omicron variant in the U.S. and China because of lockdowns and this is why medical is still not back at pre-COVID surgeries. And we do see a good growth set of opportunities for the business in the short, medium and actually long-term as well.

Progress was driven by new application growth in a number of areas within non-spine CMF, so skull plates using PEEK with support better brain function than using metal plates. We saw 30% growth. And this business has now doubled in 5 years and it's now at roughly GBP 8 million business alone, with further potential in both Asia and the U.S. Arthroscopy was up 30%, cardio was up 11% and drug delivery was also up in double digits and the inert nature of PEEK seems to serve us well in this space.

If we move to Slide 18, and the opportunity for acceleration in medical. Medical revenues in FY '22 was 17%, 1-7, of the group. But if you go back 10 years, they were 23% and had been in the mid-20s since the late 2000s. Yet in the past 10 years, we've seen much stronger growth in the industrial division, all end markets with aerospace, value-added resellers and electronics being notable highlights.

However, our intention now that we see increased interest and pull through in our medical mega program from both Tier 1 and smaller companies is to focus on how we can accelerate our medical revenues as a proportion of group revenue to around 1/3 of our total revenues in the next 10 years. This will definitely help our earnings stability with a less cyclical business in medical. But also medical tends to be stickier business, if I can phrase it that way, even if the adoption time, development time is a bit longer.

How we do this will be driven by all of the segments on this slide, but from trauma and knee particularly. We're getting close to an inflection point in trauma, having signed up a key player and with further partnership opportunities in the pipeline. And in knee, potentially the largest of our mega programs with around $1 billion addressable market opportunity for us.

So on trauma, specifically on Slide 19, really pleased to have secured U.S. FDA approval. And thus seen the first patient implants of our PEEK composite trauma plates, as a part of our In2Bones partnership. Remember, we've seen PEEK-based trauma implants before, but -- and we've built up a capability to make plates over several years. But what In2Bones gives us is access to a much wider market and it is also the first plate that Victrex makes entirely. In other words, we make the polymer, we make the tape, we make the plate itself.

The picture on the slide is of a foot and an ankle with PEEK composite-based plates. Trauma plates using PEEK have demonstrated a better union rates and revision rates that are lower compared to metal-based implants, given the modules of PEEK is being similar to the bone. So, we're extremely pleased to deliver this milestone yet this year and we'll probably be reporting on a few other ones as we progress to the year ahead of us.

We're also seeing a number of partnership opportunities in Asia to help us scale up the manufacturing of the plates. I will come on to our mega program revenue tracker soon. But we do see the opportunity now for revenue to start building from the trauma program reaching double digits over a period of the next 2 to 3 years.

Moving on to knee, knee is probably the program that has the greatest revenue potential of all of our mega programs at well above GBP 50 million a year in its PEEK sales here. After some challenges during the COVID pandemic, the clinical trial has really accelerated over the past year, with a total of 30 patient implants now including 12 who have had their PEEK-based knee for over 12 months with no clinical intervention needed. These implants were conducted in India and Belgium and Italy with our partner Maxx Orthopaedics. And it's good to keep in mind that the reason for change within the knee market is already there, with 1 in 5 patients not happy with the metal-based implants, which are typically based on cobalt chrome.

Metal knees can be heavy, they can be [ cold ] but the most important part of the value proposition is the fact that PEEK-based knees will demonstrate and will lead to much lower bone loss over time, which is a big issue. Interest in metal-free implant is also growing on the back of increased awareness of sensitivities associated with the use of certain metals. So the signs look really promising for our solution. And for some patients, we'll be coming up to 2-year milestone already in early 2023.

What I'm really pleased to announce today is the fact that we now have a new collaboration with Aesculap, one of the top 5 knee companies globally, which is obviously a significant milestone for us as we've been working hard on for a number of years. So we're incredibly pleased with the fact that we have a new collaboration with Aesculap that will aim at giving them PEEK-based knees as a significant part of the product portfolio.

So now we're just -- not just working with the Tier 2 players, we're also working with Tier 1 players. Remember also we make the knees and we have developed a significant amount of IP around them, as well as know-how that is a part of our value proposition to our customers and partners along with the clinical data that we accumulate over time. So whilst the clinical trial is progressing nicely, really working on the pathway towards commercialization in what we identify as an addressable market of around $1 billion a year.

Pathway to commercialization, a brief word here on how we will increase the commercialization of these medical opportunities. Firstly, we've been building up our capability in parts over several years by now. It's been a long journey. This required a lot of patience and resilience and we're extremely pleased to see particularly these 2 programs now getting rapidly towards the inflection point of commercialization and adoption.

For example, in trauma, a composite tape facility plays a part not just across trauma, but also for Magma and aerospace. So it is really a platform technology for us now for several mega programs. In medical, the IP is held by Victrex and we have the opportunity to either manufacture ourselves or license the technology with partners, which is what we're doing with trauma, as an example.

The new news today on this slide is that we have opened or will be opening shortly a new product development center in Leeds within the U.K., which is close to many medical device companies and academia. We'll have in excess of 20 highly-skilled employees there to meet the increased demand for specific engineering and design requirements from our partners both in knee and trauma. This will support how we move forward to catalyze early adoption to a greater mark-to-market over the coming years.

Now moving to industrial on Slide 22. Overall, the majority of our end markets performed well this year with the exception of automotive, though the market indicators for this end market look slightly more encouraging into 2023. IHS data now forecast around 79.6 million cars to be produced in 2022, but stepping up to roughly 83 million cars in 2023. It's worth putting in context that in 2019 there were around or in excess of 90 million cars built. So we know that there was some pent-up demand within automotive, but semiconductor chip shortages have held back this business, so we did see 2% growth in the second half over the prior year. So good medium-term opportunity and together with our progress on Gears and in E-mobility, which I'll talk about shortly, there's plenty of opportunities here.

Aerospace, so whilst volume growth was 2%, revenues were up 21%, reflecting a better mix and price driven by gradual recovery in this end market with film and composite tape creating new opportunities for us. Build rates are increasing on a number of models. We note that Airbus deliveries year-to-date are up 8%. We also know that pre-COVID build rates have still not been reached within Airbus. Airbus, probably about 15% lower than pre-COVID built on the A320 models and Boeing over 30% lower on the 737 Max based on their published build rates. I will talk about our Aerospace Structures program on a separate slide later on.

In Energy and Industrial, 9% volume growth, energy within that was up 19%, 1-9, reflecting the buoyancy of this end market. Energy is less than half of this segment with global rig count was up 111 rigs in the last year to 911 at the end of this financial year for us. We're also seeing some really good progress in renewables. PEEK is used in varying applications, reflecting its durability, mechanical strength and less maintenance requirements relatively small revenue still, but currently some exciting opportunities here. And we continue to explore and make progress on some potential applications for PEEK within the hydrogen supply chain.

Electronics 10% volume growth and well spread across the segments. Semicon did perform well, although our industry forecasts of 4% growth in semicon for the calendar year 2022, then expecting 4% decline in 2023. And finally, in value-added resellers, they're up 12% during the year and it's a record performance there. We continue to build closer relationship with our longstanding partners here in both stock shapes and compounding. And whilst the visibility is never great in value-added resellers, we're getting a greater line of sight to volumes here, though, as we note in our outlook statement, we're seeing a few signs of whilst normalizing, and I stress that word, normalizing, where we've come off Q2 and Q3 with record volumes here. So still good opportunities, but the industry is -- vast serves like electronics and energy, manufacturing and engineering may see what you could call a cruising altitude as opposed to the take off slow that we have seen in the past couple of years.

Moving on to Slide 23 on Gears. I'm talking about the mega programs in general. Firstly, Gears, after delivering over GBP 1 million in revenue here last year, we now see over GBP 4 million in revenue delivered, which is based on the path of Victrex mix, but also on what we call resin plus where Victrex has a key role in the development of the gear application. This is classic innovation as I have said countless times before, we do not intend to make the whole world demand of PEEK Gears, it's about seeding the market and driving adoption with the own relationships that we have and then when it comes to actually producing the Gears, we have created partnerships that allows us to execute and meet demand with different partners across the globe.

On E-mobility, Slide 24, so whilst Gears has moved ahead nicely. And as I've said, across combustion engines and electric vehicles, you also made some really good progress this year on E-mobility applications. PEEK thus offer a number of benefits in wire coating applications. It is very durable, it has dimensional stability. It is a great insulator for both electricity and heat and it also is less intensive to manufacture than the enamel that is used in the lower voltage motors. So also brings ESG benefits because of the absence of solvents used in the coating of the wire.

And remember that we are really focused on the next generation of motor. So the 800 volt motors where the performance requirements are higher. Overall revenue in this segment now is less than GBP 1 million. But we have the opportunity to step this up significantly in the next couple of years. And with an opportunity of on average getting to way more than 100 grams of PEEK per vehicle where we're now at around 10 grams per vehicle. We also secured some new business here on a number of platforms in Europe and in Asia this year that will start to have an impact in the years to come.

Slide 25 on aerospace, and this is probably one of my favorite ones. If you remember back in 2018, which feels like ages ago, we signed an agreement with Airbus for development collaborations as part of the Clean Sky 2 program to focus on the wings and the fuselages of tomorrow. The approach is based on using our AE 250 low-melt PEEK, we can deliver time savings compared to thermostat composite with that polymer where you still have to cure the structures in an auto cloud as an example. So thermoplastic composites enable much bigger structures to be made. They are formed through in situ curing, don't need the auto class, as I said before, and they also have the major benefits of being able to be welded together as part and strengthened with stringers and structures that also can be welded to the skins and the structure as shown in the picture there in the middle and the picture there on the right as well.

Thermoplastics offer around 60% weight savings, which translates into fuel savings and of course, then CO2 savings as well. But it also allows the planes to be built faster with -- is an important feature, given the backlog of single-aisle planes that is still out there and thermoplastics offer a great potential for recyclability as well.

So ESG benefits, time savings and ease of manufacture all contribute to the value proposition here. And it's really pleasing to see the parts, the last parts that are now starting to emerge as demonstrator parts for a variety of different parts of the plane in various trade shows around the world and in some of the published material from our collaboration partners on Clean Sky 2.

And if we consider that on a wide-body Airbus model, you might have currently 0.5 tonne to plane scaling the opportunity suggests that we could increase that by an order of magnitude going forward and that's probably a relatively conservative estimate at this stage. So a great opportunity, unlikely to see revenues in the short-term or before 2026, but in the meantime, we will be securing some prototype revenues over the next few years on the back of these programs.

Slide 26, on Magma, the new news this year was the bid programs have been submitted by TechnipFMC for the packages with Petrobras in Brazil. Remember, that Technip is looking to utilize a hybrid flexible pipe with PEEK, the PEEK as its core using our PEEK and our composite tape as well backed up by steel armoring.

In a hybrid flexible pipe like that, typical weight savings is around 50% versus steel and water for the hybrid pipe. Technip did visit our board this year and we have already moved ahead to support them to scale up with new pipe extrusion facility being built in Acu in Brazil and that's Technip that is doing that. Victrex has licensed its extrusion technology to TechnipFMC. But also remember that all the qualifications are based on Victrex-based PEEK core and Victrex-based composite pipe that is than laser welded onto the core.

So as it relates to this opportunity for TechnipFMC to share sort of further news flow on this following their purchase of Magma Global last year. They are very positive on this opportunity and 2024 is likely to be a key year for them. We will play our part in supporting them in the pathway to much bigger revenues that if everything goes according to plan like as I said, should start to show up in 2024.

Slide 27, so pathway to GBP 10 million in revenues. I'm afraid the bubble chart fans from the past might be a bit disappointed, but now we have a new version of showing the progress and the potential associated with our mega programs. What we want to show here is the next step on the journey for our mega programs. So aside from knee, which is making good progress in clinical trials, all of our mega programs have the technical and commercial feasibility now proven. And the reason that I exclude knee is because we cannot really claim that until the clinical trials are completed. So they no longer just a bubble, they are real.

And what we wanted to show you was the potential roadmap to the GBP 10 million revenue opportunity, with some focused on that in the next couple of years through particularly Magma and trauma. Trauma might have a longer adoption time often driven by qualifications like the aerospace opportunity and knee. And knee, which is the biggest opportunity of all of them will probably take us a few years to get there still.

In summary, we felt it was the right time to show the next step of the journey now for our mega programs, and we look forward to keeping you updated on progress. And it's interesting to note that, as I've said a number of times before, we've always known that these programs are technically doable and we've proven that. We've done a number of analysis and assessment on the economic viability. So in other words, if you can do the and meet the talent technically, is it at a price and a cost that is acceptable for a given application.

We know that these are the 2 questions that you always have to answer with disruptive technology. It's been absolutely convinced that we could answer them positively and we have, but that doesn't automatically guarantee you adoption and commercial success. But I think what we're seeing now is that we are really accelerating towards the inflection point of commercialization. And now we have new chip companies lined up with almost every one of them creating the pull through for that demand. And that is, I think, a milestone and a set of milestones that we've actually delivered on most of those throughout this year. So significant progress on these.

Now if I move now to Slide 28 on the outlook. Then sort of a brief word on our initial view on the end markets for 2023. So with the unmet demand and performance not yet back at pre-COVID levels, we're relatively optimistic on aerospace with build rates sort of steadily anticipated to increase through the next 12 months. We're also optimistic on medical. The surgery rates still below COVID levels in many regions and the impact of further lockdowns in China having had an impact this year, and therefore, impacted the total number of surgeries conducted there.

We are neutral on electronics, energy and automotive. Electronics, as I noted before, in my talk, you know that WSTS forecasts a 4% decline in semicon shipments in 2023 though Asia is dragging the overall global picture down. On the energy side, whilst still we're expecting buoyancy there, we note that rig count increases have slowed down. And for example, both in Canada, where Canada was down a few rigs last month, and the U.S. has been relatively flat now month-over-month. We also know that in the industrial part of energy and industrial or what we call manufacturing and engineering, we see signs of CapEx being ran back as companies are conserving cash and trying to maintain a healthy balance sheet in view of the anticipated recessions in key markets.

Automotive is a bit of a tough one to call. So whilst IHS data suggests growth in both car production to around 83 million, 85 million cars next year, I think we need to see further signs of the backlog coming through. And finally, as I signaled earlier, we have seen some signs of normalization in VARs in the current quarter, nothing drastic, but certainly not the run rates we have been seeing in the previous, let's say, 18 months or so. And clearly, they are sensitive towards industries that are considered CapEx by many customers around the world, whether it's in food production or chemical industries and the like where as I said the focus on cash [ conversation ] is quite high these days.

So we had a record Q3 in 2022 with 700 tonnes with VARs and a record year of 2,100 tonnes roughly with them as well. So really a fabulous year with the value-added resellers and a true testimony of the strong relationships that we enjoy with them. They have not been in a position yet to replenish their inventories. But as I said, based on the set of macroeconomic assumptions that we are making and they are making, we're expecting to see this reaching more kind of a normalized level of demand in the year to come.

So in summary, a really, really good year for Victrex, record revenues, record volumes and further opportunities for growth in our core and in our mega programs. We are mindful of the macroeconomic outlook and the potential uncertainties that are associated with that. We have seen a steady start of the year. And I think we have shown resilience through previous recessions or pandemics. And we've always emerged from those stronger than we were when we went into it with a strong customer focus and with a strong focus on preparing ourselves for the upturns. I want to say as well that there are still challenges with inflation, as we heard Ian talk about before, and after mitigating that with both price increases with surcharges to cut off the huge spikes that we have seen with contract modifications as well and through efficiency gains within the company.

So overall, as you look towards the bottom line next year, we're focused on modest revenue growth and PBT. So even if volumes may be relatively flat based on the normalization of VARs and the uncertainty in oil and electronics, as I mentioned before, modest profit growth assumption is based on the benefit of pricing, the benefit of a better sales mix, as Ian suggested, average selling prices now could be closer to the high 70s or around GBP 80 this year. And clearly, the benefit of a tailwind from currency in FY'23 and a likely tailwind into FY'24 as well.

Finally, as you heard today, our long-term programs are particularly strong and have made a significant advance during the year. So whilst navigating the periods ahead might be challenging, I think the resilience of the company and the financial health with the strength of the core business with pent-up demand still out there from pre-COVID and with the fact that some of the mega programs will start to add significantly to our top line towards the end of what could be a recessionary period should bode well for us in the future.

So thank you all for listening, and we'll now open up the floor for questions, and we'll start with questions from the room. Alex?

Question
Unknown Analyst (Analysts)

Just a couple of things. So first one is probably more on the pricing comments you just made, and I think Ian referenced the delay in recovering costs through FY'23 as well as what you see in '22. Can you tell us where the delays are? Is that mainly in the longer-term contracts in medical and in aerospace? Or are there other areas I'm missing in that? That's the first question.

The second one is, in knee, probably a question for Martin, actually. I saw there was a recall from Zimmer in the current knee implants after pretty serious rejection rates by patients in the U.K., I think I saw a number of 20%. Is this an opportunity for you? Or is that quite a niche area?

Answer
Jakob Sigurdsson (Executives)

So on the pricing side, it is quite widely spread. The long-term contract has been quite widely spread, I should say, for our product. Consider the fact that we are quite often a single source of supply for PEEK into certain qualified and certified applications that can be aero, auto, medical, in particular, energy as an example. And that essentially has in the past brought up the need for longer-term contracts with all kinds of contingency signing as well to secure security of supply. And so it's not just on the medical side, you would see typically in the contract on the automotive side, on the aero side with the VARs because remember also that they are exposed to the same end markets as I'm referring to directly. So it is a significant part of our volume.

And part of our mission this year has been to change these contracts with elements as well as to go through price increases. So I think that will allow us to deploy a greater number of measures to meet such sudden spikes and such high spikes as well. We are reflecting on it a number of times this year [indiscernible] sensitivity analysis to all kinds of factors a few years ago. We tested the impact of energy price rises to the tune of doubling and more and it didn't really move the needle at the time. It certainly has moved the needle this time.

And this has called for change in the way you construct our contracts. We have chosen to honor our contracts, and that's important to us. And I think that's truly taking a long-term view on the partnership and being a solid business partner to your partners. It's during times like this when it matters the most. It's easy to be kind and nice when the sun is shining. It's a bit more difficult at times to support your customers when times are tough. We have chosen to honor the contract. But we will and we have been modifying our contracts to allow us greater flexibility to meet such dramatic changes as we have coped with this year.

Then on the knee side...

Answer
Martin Court (Executives)

That sounds an interesting one. So any disturbance of any industry space that we're trying to get into is potentially an opportunity. But it's a bit early. So we're not far enough through the trial now to be ready to do anything very timely. So I actually think it's more a warning for us to say make sure that you did the trial properly because the last thing we want is a recall on something that's radically different as ours. So if that happens in 3 years' time, that will be a very nice opportunity for us to provide a sound alternative. We just don't have enough evidence yet. [Technical Difficulty] really to get [indiscernible], we need to do a broader trial and we will go at the moment...

Answer
Jakob Sigurdsson (Executives)

If you could introduce yourself when you make the question, that would help the callers on the line as well, please.

Question
Adrien Tamagno (Analysts)

It's Adrian Tamano from Berenberg. I have 2, please. First, on the value-added reseller volume comments. Can you please maybe help us understand what are the current trends that you see on the demand front with slowdown in Europe and maybe the prospects of reopening in China?

And secondly, on the gross margin bridge, you've showed a 7.8% improvement from operational efficiency. How should we think about this for next year as the inventory buildup might be and there could be more debottlenecking to come next year?

Answer
Jakob Sigurdsson (Executives)

You want to start with the gross margin bit, Ian.

Answer
Ian Melling (Executives)

Sure. Yes. So I don't think we can expect to see the level of improvement we've seen this year going in '22 going into '23. Clearly, we saw a big efficiency benefit. Some of that was in our monomer production as well as our polymer production. We do have some shutdown time planned for the current year. So I wouldn't expect to see the same benefit year-over-year going into FY'23. Obviously, there will be some buildup ahead of a shutdown towards the end of the year as well. But I think it's much more balanced going into FY'23 as opposed to big improvements in FY'22.

Answer
Jakob Sigurdsson (Executives)

Sort of on the key volume assumptions, Adrien, then we clearly look at some of the published data, obviously, that I've been referring to throughout my presentation mixed with our market intelligence as it relates to new product launches and discontinuations. But if you look at it at a high level, we are anticipating a recession in Europe market. I think we are as well, and I think that's increasingly sort of I talked to you that we might see a recession in the U.S. Although I think in general, the talk there is about a relatively mild one. And the question then is always about the duration of those. And I think we're looking at something in China that is probably going to be in the mid 3% to 4% range in terms of GDP. Now if we look at it on auto, as I said before, we do follow IHS with our own sort of algorithmic interpretation of that. And that should indicate a modest growth there next year, so roughly 79 million cars made this year to probably 83 million, 85 million cars produced next year. Still hear though rumors around issues in the supply cannot just on the back of chip shortages but another things as well.

And then you've got to wonder whether there will be a dampening effect on that by the fact that the people will be having less disposable income in the more sort of economically mature markets in the world. Energy, energy prices will still be high. So that's good for energy business, manufacturing and engineering. I mentioned it in my conference here, we look at PMIs, and they have a strong correlation with our business in manufacturing and engineering. So we look at those across the board. And those are relatively subdued right now, and that's not a surprise given the focus on conserving cash and maintaining healthy balance sheet that we sail into a more unchartered territory, if you will. And then clearly, on the medical side, I think that's where we're starting to feel much more confident about the upside than any of the other sectors, which is clearly an important path for us given the pricing and the impact that it has on our bottom line. So that's in a nutshell how we go about and sort of the key assumptions at a very, very high rapid level, if that helps you.

Question
David Richard Farrell (Analysts)

David Farrell from Jefferies. A couple of questions, please. Firstly, just to focus still on the gross margin again. I think you're talking about 10% average selling price increases, which is about GBP 35 million, GBP 36 million incremental revenue. You said energy costs were probably GBP 20 million higher along with raw materials. So what prevents gross margin going up next year, what am I missing in that calculation?

And then my second question, could you just delve a bit deeper into kind of the semiconductor market, kind of what your exposure that is there? I think you talked about a 4% decline. You would have wafer fabrication equipment, they're talking about 20% declines next year. So kind of where are you positioned?

Answer
Jakob Sigurdsson (Executives)

Yes, I'll start with the semicons first. And that's basically the 4% that I was referring to is in chip manufacturing rate, CapEx is going down further. We are a much bigger part of the consumables than we are on the CapEx side where PEEK is used in the polishing process of the wafers in CNP rings in particular. So you could look at what we do much more of the consumable as opposed to a capital-driven usage.

Answer
Ian Melling (Executives)

I don't think we quote to the 10% price increase, but there is around 80 potential on ASP, which is probably what you're referring to, David, I think. Just a reminder, 50-plus percent gross margin business. If you want to maintain that gross margin with GBP 20 million of cost increase, you have to pass on GBP 40 million of price, right? So GBP 35 million price on GBP 20 million cost would still be a declining margin percentage, could be improved gross profit, but the margin percentage is declining at that point.

Question
David Richard Farrell (Analysts)

[Technical Difficulty]

Answer
Ian Melling (Executives)

Yes. I think we're more confident of gross margins going up when we see energy prices stabilize. The methodologies we're using to pass those prices are now including surcharges will run as a lag to those energy prices. So when energy prices stabilize, then I think we can be more confident that we can kind of finish our price increases associated with the energy prices on a sort of 6- to 12-month lag, which is the kind of that we have a lot of 12-month contracts, that Jakob spoke to earlier and then see energy prices rise from that. I would say, we have our factory in China coming online later in FY'23. margins from that are likely to be under pressure initially as they often are with any kind of startup, any factory that's starting up. That pressure is in overheads at the moment prior to startup but post startup will move to gross margin.

Question
Unknown Analyst (Analysts)

[indiscernible] from Bank of America. I have a question about your pricing and your decision to include surcharges. I'm just wondering how sort of sticky you think these can be going forward? And more specifically, what is the lag between you sort of maybe normalizing the surcharges in a deflationary environment?

Answer
Jakob Sigurdsson (Executives)

Martin, do you want to take that...

Answer
Martin Court (Executives)

Yes. So we're dealing with the price pressures and cost pressures in 2 different ways. So we believe there's an underlying escalation in our cost base based on inflation, and we're clearly trying to pass that through in consolidated price increases. And we really the way in which we're doing it, we're doing that in a way which should be able to bring our customer base with us. So we expect that we will hold on to those price increases. When it comes to surcharge, then we're looking very carefully at what's our energy build, what is our real energy build and how do we translate that across into a surcharge that we can then build against the changing energy costs, so we separate and we're separating the 2 very clearly. So will surcharge stick? No because it's not supposed to, it will work against what the energy costs are well priced, we think so.

Question
Unknown Analyst (Analysts)

My second question is about VAR more specifically. You said you've seen a normalization. I'm just wondering into sort of the first 2 months of this quarter, has that normalization sort of extended to indicate that maybe customers are destocking a bit more into the calendar year end?

Answer
Martin Court (Executives)

I'll take that one. So this is a tropical phenomenon though. And if you look at our performance from a historical perspective, the first quarter is always the lowest quarter of before. And I think we're seeing sort of a steady state versus what we saw in the first quarter of last year, maybe a slight decrease, but nothing drastic there I would say. But it's a classical thing towards the end of the financial year that people will run down inventory. And that the fact I think it probably increased given the economic circumstances that we are seeing where the focus is really on conserving cash and minimizing inventory across the whole supply chain around the world.

Question
Kevin Fogarty (Analysts)

Kevin Fogarty from Numis. Just going back on pricing, I think at the half year stage, you outlined pricing would kind of follow the contract renewal cycle. I just wondered if you can help us kind of where are you sort of quantifying just in that process, i.e., sort of how many more or what percentage of your contract renewals might fall into FY'23? Or are you up to date currently excluding any kind of surcharges, I guess, just to sort of quantify what that might look like for 2023. And just going back on inventories, when you look across your industries in terms of end markets, I just wondered sort of how much of your sort of caution or nervousness in end markets is around sort of customer inventory positions currently on how they build that perhaps.

Answer
Jakob Sigurdsson (Executives)

Well, Martin, do you want to take the pricing one, I'll take the inventory one...

Answer
Martin Court (Executives)

So we're probably into quite a busy period of negotiation there. So now there are a number of contracts that come at the end of the year, by the end of the calendar year. So we've got a busy period coming. And then after that, we should be through the process.

Answer
Ian Melling (Executives)

And some of those will be the second time around, right. So we have done something in the last cycle, and we're doing something more this time around on the annual contracts.

Question
Kevin Fogarty (Analysts)

Okay. So maybe sort of Q2, we should be fully complete?

Answer
Martin Court (Executives)

Well, I think that we will be thinking about our pricing on an ongoing basis, and that's why we've adjusted our contracts in the way we adjusted our contracts.

Question
Kevin Fogarty (Analysts)

Okay. So just I guess on that frequency, kind of what would that look like then in terms of your ability to raise prices on a more frequent basis going forward?

Answer
Martin Court (Executives)

Well, we tend to have annual contracts. And if we've got contracts longer than that, we're making sure that we have more flexibility than we've had in the past because you have to recognize the inflation environment in there.

Answer
Jakob Sigurdsson (Executives)

I think there are a number of sectors and segments where we've gone more than twice increased prices, I want to state that. I mean the ones where we have the annual pricing mechanism, we've really been working on changing those over the year that's just ahead of us. And that's what Martin is also referring to that. We will be negotiating these when we are for an effect from the 1st of January. Then on your question on inventories, not concerned about high levels of inventory in the supply chain actually. I think that we are seeing a destocking effect. And I can trace this probably all the way back to 2018 normal for, let's say, 2019 when we had the mini recession on the back of Dieselgate and all of that, followed by COVID followed by the energy crisis right now.

And I think inventories in the various channels that we serve has by and large not recovered. I think they've been running relatively thin, I think they'll be running thinner as we head into the year-end right now because of what I mentioned before. And that is a classical pattern if you almost study metrics from its inception that in the lead up to subdued economic conditions, people will again conserve cash to maintain a healthy balance sheet and some safety margins and reduce inventories, particularly towards the year-end. And we see that with kind of a canary in the coal mine to that effect. But then when the situation turns around, we see this rapid sometimes ahead of many others as well. But if your point was whether I'm worried about too high inventory levels, no, that's not my concern right now.

Question
Margaret Schooley (Analysts)

It's Maggie Schooley from Stifel. You've been alluding for a while to growing the medical business quite significantly on a longer-term basis. And I think the chart on page about 18 is actually relatively interesting. We know Knee is $1 billion, but can you give us a greater understanding of what you see the total addressable market is for those various applications? Point number one. And then is this slightly like the flywheel in terms of the medical industry once a material gets into commercial acceptance that you can quickly or more quickly drive adoption in other applications? And those are the 2. And then the last question, sorry. I know the trial is going on. But in terms of the qualification of a med tech partner, how long would you anticipate once it's being picked up in commercial production that you need to have those qualification processes for the actual device itself?

Answer
Jakob Sigurdsson (Executives)

You want to take the last one, Martin, I'll speak to [indiscernible] about the potential.

Answer
Martin Court (Executives)

So on the flywheel, there's clearly credibility that comes from having a material in somebody's body and spent a long time there with no adverse reaction. And we sit in a very nice place with that. having had 15-plus years of experience and never having any type of allergic reaction or any problem. So we start from the fact that are people comfortable with PEEK in people's bodies? Yes, they are. But in each application, you need to go through a safety demonstration, a proof of concept and also to make sure that you're not in a situation where you're putting patients at risk. So flywheel is probably a bit strong on the amount of momentum. You probably reduced the amount of resistance by the more things that are done with your material, the easier the actual adoption is. But in terms of the process to get it certified, it makes no difference.

Question
Margaret Schooley (Analysts)

What do we think the addressable market is?

Answer
Jakob Sigurdsson (Executives)

So if you look at it right now, I think the total number of operations per year is roughly around 4 million a year. And it did grow 35% between 2009 and 2019 and I think it's actually anticipated to grow at a faster rate going forward given the aging population and the increase in knee-based arthritis as an example. So for, let's say, 4 million procedures a year, roughly probably 3 million of them are cementless, maybe 1 million of them cemented, cementless clearly commands a premium. So the overall size of this market is probably well in excess of 10 billion. And I think it is reasonable for us to assume what we would get, let's say, at least low single digits in revenue from pieces in there and that may differ based on whether it's a tibial part or a femoral part. So I think it is a sizable opportunity for us. But it will take time to get into it. But I think we all know that once you've got a proven sort of solution that works in this space, it's going to stay there for a long time because there is not a real incentive to change.

And it's our belief that this will be a game changing solution. and actually I failed to mention as well when we're talking about medical in word of context, so you see the progress on CMS, which is really growing that, but we see the progress on cardiovascular in drug delivery devices. Spine, where we have the first generation, we have the second and the third one, we are aiming at filing an application with the FDA on porous 3D printed cages next year. That's sorry. I'm not saying absolutely there, but that is something we're aiming at for the current financial year. And then you couple the very tangible progress and the opportunity within trauma and knee. And I think that's a very credible proposition for being able to change the mix and the proportion of medical within the overall revenue base on a growing industrial business at the same time. So I think that's an obvious great opportunity for us, and that's what we're very focused on building up capabilities in that area. And we've been focused on that for years. I think now we're really starting to see the sprout sort of popping up in a very tangible way.

Answer
Martin Court (Executives)

One thing I have to say about the flywheel as well. So once you're approved in a particular application and the whole predicate system works pretty well and then make -- once you're into a particular application space, then you've been able to get a more like the snowball rolling down the hill type.

Question
Margaret Schooley (Analysts)

I didn't know if you could use any form of the data with which you've gathered to then apply to something else that you have to recreate...

Answer
Martin Court (Executives)

Well, some of the [indiscernible] data you can use, but the actual specific for the application in...

Answer
Ian Melling (Executives)

You need to see a clinical work after that, which is not going to...

Question
Andrew Stott (Analysts)

Andrew Stott UBS. Can I just follow up on China on the comments on the commissioning. Am I right in thinking that 6 months delays or...

Answer
Jakob Sigurdsson (Executives)

It's above 6 months...

Question
Andrew Stott (Analysts)

And is that to do with COVID and lockdown? It seems so, right?

Answer
Jakob Sigurdsson (Executives)

Yes.

Question
Andrew Stott (Analysts)

Did I miss a guidance for this year on OpEx, you have the GBP 3.1 million for the year just finished. Is there a guidance for this year?

Answer
Ian Melling (Executives)

I think it will be higher this year, so it's going to get worse before it gets better, I guess, it's the guidance. So I expect a little bit more this year than in the previous year in terms of startup costs through the P&L. And I would say no significant revenues in the current in FY'23.

Question
Andrew Stott (Analysts)

Okay. And the order book, how is the interest in the project?

Answer
Jakob Sigurdsson (Executives)

I think all of the assumptions that we made when we started are still holding up. And remember, it is our focused approach. It's a product line extension and sort of very much focused on China for China with some of our largest customers wanting to be supported by us over there. So that set of assumptions still hold.

Question
Andrew Stott (Analysts)

Could you characterize the customer industries in China that are coming to you? Sorry, could you characterize the customer industries that are coming to you for the China project?

Answer
Jakob Sigurdsson (Executives)

[indiscernible] auto, and I would say energy and industrial. The 3 would be the key ones that would be the end beneficiaries, if you wish, main channel to the value-added resellers.

So maybe we open up for questions from those who are participating via the phone.

Question and Answer Operator Message
Operator (Operator)

[Operator Instructions] We will take on for question from Chetan Udeshi of JPMorgan.

Question
Chetan Udeshi (Analysts)

Maybe a quick one, but a bit more difficult one, I guess. But Jakob, you mentioned in your discussion, record revenue, record volumes, which is great. But when we look at the profitability, it's well below the record level. So I'm just curious when do you think we can see the kind of profitability that Victrex used to do in 2017, '18? Again, I know there are headwinds, but we've seen headwinds now for a period of time. So I'm just curious when do you think maybe can see Victrex go into those levels of profitability, 110, 120, 130 given the kind of momentum that you're talking about from a pipeline and demand perspective?

Answer
Jakob Sigurdsson (Executives)

I don't think you'd expect me to put a year on that. I mean you gave quite a broad range of potential outcomes there as well. What I would say is we're focused on driving that profitability. But at the same time, we're not going to compromise on investing in the programs that we've got and the significant opportunities that we think are out there such as those in the medical space that we were just talking about. So we're focused on driving the profitability. Clearly, there are going to be challenges this year, and we've talked about that. Our guidance is modest profit growth this year. I think in a world where inflation stabilizes a little bit, and we can benefit from our price increases kind of normalizing, if you like, we can drive the volumes and the end markets are strong, then we can look to drive profitability from that. Yes, I don't think I can put a specific year on a specific number at this point beyond the guidance we've given.

Answer
Ian Melling (Executives)

No, if I may add to it a little bit as well, then I partially sort of mentioned it in my part that when we enter, I think the turbulent times that are ahead for global economies, we will be at a point where we've made the lion's share of the investments that we need to make to be able to support the volumes of the future. And by that, I mean China, I mean debottlenecking [indiscernible] as an example. And we will be seeing the benefits of the [indiscernible] of the volume that will come our way at that point in time from a growing core that will start to roll again and command greater volumes, which will be proportional to GDP and maybe GDP plus from the fact that we have the unmet demand from pre-COVID.

Number 2, and from the fact that it's likely to confluence with some of the inflection points associated with some of the mega programs. And that's when I think you'll start to see real levers that will have an impact on profitability that could take us to the profitability of the period where we were not investing a lot. So remember that these investments are skewing the bottom line quite a bit these days, whether it's in capabilities and or our assets as well. So I think once we sail out of that, I think we will emerge quite rapidly not just on the top line but on the bottom line as well.

Question and Answer Operator Message
Operator (Operator)

There are no further questions on the conference line. I will now hand back over to [indiscernible].

Answer
Jakob Sigurdsson (Executives)

So thanks for all of you that attended today. Thanks for those on the phone as well, and we wish you all the best for the upcoming [indiscernible] and the new coming year. Thank you.

Answer
Ian Melling (Executives)

Thank you.

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