Victrex plc – Annual report – 30 September 2024
Industry: manufacturing
Going concern and viability statement
Going concern
The Directors have performed a robust going concern assessment including a detailed review of the business’ 24-month rolling forecast and consideration of the principal risks faced by the Group and the Company, as detailed on pages 36 to 42. This assessment has paid particular attention to current trading results and the impact of the ongoing global economic challenges on the aforementioned forecasts.
The Company maintains a strong balance sheet providing assurance to key stakeholders, including customers, suppliers and employees. The Group had net debt of £21.1m at 30 September 2024, a reduction of £28.7m from 31 March 2024, and an increase of £4.4m from 30 September 2023. The increase in net debt during the year largely relates to the payment of the regular dividends in February 2024, £40.1m, and June 2024, £11.7m, with ongoing capital expenditure and soft trading reducing the cash generation in the short term. Underlying operating cash conversion improved to 114% for the year ended September 2024 from 18% for the year ended September 2023, supported by the partial unwind of the inventory position built during FY 2023. The Group drew on its UK Revolving Credit Facility during the period, with a maximum drawn down of £26m, before fully repaying the facility by the end of the year from operating cash flows. Of the gross debt position of £50.4m, £9.2m is due within one year. The Group maintains a cash balance sufficient to manage short-term liquidity and provide headroom against ongoing trading volatility.
The cash balance at 30 September 2024 was £29.3m. Approximately 50% is held in the UK, on instant access, where the Company incurs the majority of its expenditure. At the date of this report, the Group has drawn debt of c.£40m in its Chinese subsidiaries (with a total facility of c.£43m available until December 2026) and has unutilised UK banking facilities of £60m through to October 2027, of which £40m is committed and immediately available and £20m is available subject to lender approval.
The 24-month forecast is derived from the Company’s Integrated Business Planning (‘IBP’) process which runs monthly. Each area of the business provides forecasts which consider a number of external data sources, triangulating with customer conversations, trends in market and country indices as well as forward-looking industry forecasts: for example, forecast aircraft build rates from the two major manufacturers for Aerospace, rig count and purchasing manager indices for E&I, World Semiconductor Trade Statistics semiconductor market forecasts for Electronics and Needham and IQVIA forecasts for Medical procedures.
The assessment of going concern included conducting scenario analysis on the aforementioned forecast. Whilst Sustainable Solutions has seen a partial recovery in sales volumes during calendar year 2024 compared to the suppressed levels seen in 2023, Medical continues to experience lower demand with destocking remaining a challenge as the industry carefully manages its inventory down from the elevated levels seen during 2022 and 2023. With economic forecasts remaining mixed and supply chains continuing to be cautious in both segments, the scenario analysis performed by management focuses on the Group’s ability to sustain a further period of suppressed demand. In assessing the severity of the scenario analysis, the scale and longevity of the impact experienced during previous economic downturns have been considered, including the differing impacts on Sustainable Solutions versus Medical segments.
Using the IBP data and the reference points from previous economic cycles, management has created two scenarios to model the impact of a reversal of the partial recovery seen in Sustainable Solutions during 2024 and the continuing effect of destocking within Medical at a regional/market level and aggregated levels on the Group’s profits and cash generation through to January 2026 with consideration also given to the six months beyond this. The impact of climate change and the Group’s goal of Net Zero across all Scopes by 2050 are considered as part of the aforementioned IBP process, from both a revenue and cost perspective, with the anticipated impact (assessed as insignificant over the shorter-term going concern period) incorporated in the forecasts. As a result, the scenario testing noted below does not incorporate any additional sensitivity specific to climate change.
The Directors have modelled the following scenarios:
Scenario 1 – Sustainable Solutions demand reduces back to the levels seen during H2 FY 2023 from January 2025 for six months, before recovering to the levels seen in H2 FY 2024 for the remainder of the going concern period. Medical revenue remains in line with the softer level experienced during FY 2024 through to June 2025 before recovery commences at a rate of 10% per annum through the remainder of the going concern period. Inventory is reduced in line with sales.
Scenario 2 – in line with scenario 1 through to June 2025 but with the lower demand continuing throughout 2025, i.e. throughout the going concern period, taking the total period of lower demand, which for Sustainable Solutions started in early FY 2023, to three years, well above the duration of any previous downturn experienced by the Company. This would give an annualised volume below c.3,300 tonnes, a level not seen since 2013. In this scenario, destocking would continue to impact Medical revenue which would remain at an annualised revenue comparable to FY 2024. With the period of prolonged lower demand, a more aggressive unwind of the inventory balance has been assumed. The Directors consider scenario 2 to be a severe but plausible scenario.
Commercial sales from the new PEEK manufacturing facility in China commenced during H2 FY 2024; however, with volumes building over time the entity will require additional funding to see it through to net cash generation. In concluding on the going concern position, it has been assumed that Victrex will provide the additional funds in full, which the Board considers to be the worst case scenario.
Before any mitigating actions the sensitised cash flows show the Company has significantly reduced cash headroom, which would require continued use of the committed facility during the going concern period. The level of facility drawn down is higher in scenario 2 but in neither scenario is the committed facility fully drawn, nor drawn for the whole year. With cash levels lower than has historically been the case for Victrex, the Company has identified a number of mitigating actions which are readily available to increase the headroom. These include:
- use of committed facility – the committed facility could be drawn at short notice. Conversations with our banking partners indicate that the £20m uncommitted accordion could also be readily accessed. The covenants of the facility have been successfully tested under each of the scenarios;
- deferral of capital expenditure – the base case capital investment over the next 12 months is lower than recent years with major projects now completed in China and the UK. This could be reduced significantly by limiting expenditure to essential projects and deferring all other projects later into 2025 or beyond;
- reduction in discretionary overheads – costs would be limited to prioritise and support customer related activity;
- reduction in inventory levels – the elevated inventory level seen at the end of FY 2023 has already been partially unwound and is forecast to continue to unwind during FY 2025. The scenarios noted above include an acceleration of the inventory unwind but a more aggressive approach could be taken to provide additional cash resources; and
- deferral/cancellation of dividends – the Board considers the cash position and interests of all stakeholders before recommending payment of a dividend. A dividend has been proposed for payment in February 2025 of c.£40m and in the past an interim dividend of c.£12m has been paid in June, giving a combined annual outflow of c.£52m.
Reverse stress testing was performed to identify the level that sales would need to drop by in order for the Group to be unable to meet its liabilities as they fall due by the end of the going concern assessment period. Sales volumes would need to consistently drop materially below the low point in scenario 2, which is not considered plausible.
As a result of this detailed assessment and with reference to the Company’s strong balance sheet, existing committed facilities and the cash preserving levers at the Company’s disposal, but also acknowledging the current economic uncertainty with a number of global economies remaining in or close to recession and the wars in Ukraine and the Middle East continuing, the Board has concluded that the Company has sufficient liquidity to meet its obligations when they fall due for a period of at least 12 months after the date of this report. For this reason, it continues to adopt the going concern basis for preparing the financial statements.
Viability statement
1. Assessment of prospects
The Directors have assessed the Group’s longer-term prospects, primarily with reference to the results of the Board-approved five-year strategic plan. This is driven by the Group’s business model (detailed on pages 14 and 15) and strategy (detailed on pages 16 and 17), which are fundamental to understanding the future direction of the business, while factoring in the Group’s principal risks (detailed on pages 36 to 42) and the potential opportunities and risks of climate change (detailed on pages 58 and 59). The Directors continue to consider the ongoing challenges to the global economy, including the impact on each market and geography which the Group serves, and the uncertainty this creates, particularly in the early years of the strategic plan. The Directors have also considered the Group’s ability to generate cash and maintain a strong financial position throughout the economic cycle, including the level of cash and overall net debt at 30 September 2024.
The strategic planning process is undertaken annually, and includes analyses of profit performance (including core business and new product pipeline and ‘mega‑programmes’), cash flow, investment programmes (including manufacturing capacity increases and our acquisition pipeline) and returns to shareholders. Completion of the strategic plan is a Group-wide process engaging employees throughout the business, including all senior management in their respective areas. The strategy was reviewed and approved by the board in March 2024 (covering the five years to September 2029). The strategy is built market by market, geography by geography recognising the differing dynamics in each whilst also considering the longer-term impact of the company achieving our goal of net zero across all scopes by 2050 combined with the wider global ambition to reduce carbon usage. The company also operates a shorter-term rolling 24 month forecast, predicated on the IBP process, which forms the basis for the 2025 budget and key operational decisions over this shorter timeframe. The first year of the strategy has been realigned to the 2025 budget, taking account of changes to the economic outlook since the strategy was finalised, with subsequent years reviewed and updated where the revisions to the first two years are expected to have a consequential impact, either positive or negative. The realigned strategy was approved by the board alongside the 2025 budget in October 2024 and has also been used for the annual impairment review detailed on page 165.
2. Viability period
The Directors have assessed the viability of the Group over the five-year period to September 2029, being the period covered by the Group’s Board-approved strategic plan.
The board considers five years to be an appropriate time horizon for the strategic plan, being the period over which the Group actively focuses on its development pipeline and resulting capital investment programme. As part of the longer-term considerations, to support capacity planning and assessment of projects which will take longer to reach meaningful revenue, the group does prepare forecasts for a period of more than five years, however, a period greater than five years is considered too long for the strategic plan given the inherent uncertainties involved.
3. Assessment of viability
To make their assessment of viability, the Directors have tested a number of additional scenarios on the base case position of the five-year strategic plan. These scenarios encompass key trading assumptions combined with the potential impact of crystallisation of one or more of the principal risks over the five-year period. Whilst each of the principal risks has a potential impact, the scenario analysis has been focused on those considered to have the most significant financial impact, primarily to the revenue growth of the Group. The risks have been assessed for their potential impact on the Group’s business model, future trading and funding structure.
The mega‑programmes are forecast to have a material impact on the company’s revenue over the strategic period. Progress continues to be made across the mega-programmes with milestones being achieved as outlined in the Strategic report on page 11. Timing of future milestone achievement and the resulting impact on revenue growth remains the key variable which the directors have incorporated into scenario 3 described below.
The impact on the strategy of both the company achieving its goal of net zero across all scopes by 2050 and the wider economy achieving net zero carbon over a long period continues to be understood and assessed. The physical risks and transitional opportunities and risks have been considered in detail as described in the Sustainability report on pages 58 and 59. The physical risks presented by climate change are not expected to have a material impact on the company’s ability to manufacture product over the strategy period and therefore no sensitivity has been performed. At the revenue level the transitional opportunities are considered to outweigh the risks over both the short and longer time horizons, supporting continued growth in company revenues, albeit the impact of this is only likely to be material outside of the five-year strategy window. The primary transitional risk relates to carbon pricing and the likely levers used by regulators and governments to drive down use of carbon – taxation and levies.
The company’s manufacturing and supply chain does use significant gas, electricity and water whilst also generating hazardous waste. Work is ongoing to reduce the carbon usage in the manufacturing process, both through using green sources but also redesigning the chemical process to reduce the overall energy requirement and waste generation. Acknowledging the risk to the decarbonisation of the manufacturing process, primarily in respect of timing, an increased cost of operation from taxation and levies has been assumed in scenario 5. The company would seek to recover this cost from customers but for the purpose of the scenario analysis a worst case position of no recovery has been assumed.
The scenarios tested were carefully considered by the Directors, factoring in the potential impact, probability of occurrence and the effectiveness of the mitigating actions. In addition, whilst considered implausible, a combined scenario (scenario 6) was also tested, which contained an aggregation of all scenarios considered. Consistent with Going Concern, it has been assumed in all scenarios that the future funding needs, including the repayment of external debt when it becomes due, of the PEEK manufacturing facility in China are met by the Company, which the board consider to be the worst case scenario.
The downside scenarios applied to the strategic plan are as follows:
The key mitigating actions available to the Directors are consistent with those outlined above in Going Concern, incorporating the Group’s ability to manage its cost base, reduce working capital, raise new finance and the possibility of delaying capital programmes and/or restricting shareholder returns, all of which could be applied over the longer viability period. In addition to these specific mitigation plans, the Group’s two distinct segments, both with diverse geographic markets, assist in reducing the risk of regional economic challenges and sector specific issues. Further, the strategy of partnering closely with customers to develop the right applications and our existing and growing list of specified products are also important mitigants.
The results of this stress testing showed that the Group would be able to remain solvent and maintain liquidity over the assessment period. The Group is profitable under all scenarios, including scenario 6. The lowest cash balance was in scenario 6, in which the cash balance remains positive albeit at a level where partial use of the RCF facility is required until mid-FY 2027. The RCF facility is available until October 2027 and the Directors anticipate refinancing would take place before this date, although no refinancing has been assumed in performing the viability assessment. Covenant compliance has been successfully tested under scenario 6 throughout the period to October 2027. Due to the severity and implausibility of scenario 6, an outcome that requires use of the RCF facility, this is considered akin to a reverse stress test.
4. Viability statement
Based on the results of this detailed analysis the Directors have a reasonable expectation, that the Group will be able to continue in operation and meet its liabilities as they fall due over the five-year period to September 2029. This is predicated on the assumption that an unforeseen event outside of the Group’s control (for example, an event of nature or terror) does not inhibit the company’s ability to manufacture for a sustained period.
Accounts examples 