Final Results

RNS Number : 7331D

Victrex PLC

08 December 2009

8 December 2009

Victrex plc

Final results announcement for the year ended 30 September 2009

Highlights

Group revenue down 26% to £103.8m

Earnings per share down 55% to 21.7p

Reduced demand across all major industrial markets but recovery commenced in second half

Strong growth from Invibio

Cash of £18.6m as at 30 September 2009 and no debt

Full year dividend per share up 5% to 19.2p

Chairman Anita Frew commented:

"I am encouraged to report that, in spite of challenging global economic conditions, Victrex has demonstrated the resilience of its business.

In response to the challenges faced, the VPS division has successfully completed a streamlining exercise to control costs while continuing to develop new business and work on potential new developments with customers and end users. Consequently, the division is well placed to take advantage of its strong operational gearing as volumes recover.

During the year the Invibio division has continued to see success across a range of end use markets and in emerging geographies. We continue to invest in resources and new technologies to drive further growth opportunities.

We remain committed to our key Group objective of growth through investment in new application development and are confident that the underlying growth drivers remain in place across our end use markets."

Enquiries

Victrex plc
David Hummel, Chief Executive	0207 357 9477 (8 December 2009)
Michael Peacock, Finance Director	01253 897700 (thereafter)
Hogarth Partnership Limited
Nick Denton / Barnaby Fry	0207 357 9477

Victrex plc

Final results statement for the year ended 30 September 2009

I am encouraged to report that, in spite of challenging global economic conditions, Victrex has demonstrated the resilience of its business.

Group financial results

Group revenue for the year was down by 26% to £103.8m (2008: £141.1m) reflecting a 41% reduction in sales volume to 1,547 tonnes (2008: 2,626 tonnes) partially offset by 37% growth in Invibio revenue. As previously reported at the half year, due to this significant reduction in revenue, we had to buy out surplus forward exchange contracts at a cost of £11.3m for the year. This adverse impact, which is reflected in reduced revenue, has been more than offset by an improvement in underlying effective exchange rates as remaining sales benefited from weaker sterling. Consequently, underlying revenue (at constant exchange rates) was £102.4m, down 27% on 2008.

Gross profit decreased by 30% to £64.5m (2008: £91.6m), representing a gross margin of 62.1% of turnover (2008: 64.9%). This 2.8% points decline in margin was principally caused by increased VPS cost of sales partially offset by a positive sales mix effect between Invibio and VPS.

Sales, marketing and administrative expenses increased by 6% to £39.4m (2008: £37.0m), although £3.8m of this increase was due to the weakening of sterling in relation to costs incurred in foreign currency and £1.9m related to previously reported one-off costs in the first half associated with the streamlining exercise in the VPS division. Underlying expenses (at constant exchange rates and excluding the one-off costs) actually decreased by 9% to £33.7m.

Group profit before tax was £25.1m, 54% down on 2008 (£55.0m), with underlying profit before tax, at constant exchange rates and excluding one-off costs, decreasing by 44% to £30.6m.

Basic earnings per share were down 55% at 21.7p (2008: 47.8p). Underlying earnings per share, at constant exchange rates and excluding one-off costs, were down 45% to 26.4p.

The overall effective tax rate (including deferred tax) was 29% (2008: 29%).

Cash flow

We continued to generate cash from operations, albeit down to £26.8m (2008: £61.9m) primarily reflecting decreased operating profit.

Capital expenditure cash payments amounted to £7.5m (2008: £25.0m) with no individually significant projects following the completion of the investment programme in additional supply chain capacity in 2008.

Taxation paid was £11.1m (2008: £15.7m).

As at 30 September 2009, the Group had cash of £18.6m and no debt (2008: £23.5m and no debt). The Group has a committed bank facility of £40m, all of which was undrawn at the year end. This facility expires in September 2012.

Dividend

The Directors are recommending a final dividend of 14.0p per ordinary share (2008: 13.1p), making a total of 19.2p per ordinary share for the year (2008: 18.3p), an increase of 5%. Resulting dividend cover is 1.1 times (2008: 2.6 times).

Victrex Polymer Solutions ('VPS')

	2009 £m	2008 £m	Change %
Revenue	69.6	116.2	-40%
Gross profit	34.4	69.7	-51%
Operating profit	6.3	41.1	-85%

VPS revenue fell by 40% to £69.6m (2008: £116.2m) with underlying revenue at constant exchange rates down 38%.

In response to the significantly lower demand, and the need to adjust inventory levels, polymer production was reduced and monomer production was suspended during the second half. As a result of improving sales volume in the second half, we have now increased polymer production levels and recommenced monomer production.

Gross margin was reduced by 10.5% points to 49.5% of turnover (2008: 60.0%) largely as a result of increased cost of sales in the second half. This increase was principally due to increased fixed production costs per tonne incurred as a consequence of the significant reduction in production volume.

Sales, marketing and administrative expenses reduced by 2% to £28.1m (2008: £28.6m). During the year we have continued to invest in new applications and growth areas. We have however taken actions to streamline VPS incurring £1.9m of one-off costs. In addition, expenses increased by £3.3m due to the translation of costs incurred in foreign currencies as sterling weakened. Underlying expenses (at constant exchange rates and excluding the one-off costs) reduced by 20%. The streamlining exercise, which has been completed, is expected to reduce costs in 2010 by a further £2m. As planned, Group staff numbers (excluding Invibio) have been reduced by 10% to 437 as at 30 September 2009 (2008: 486) by a combination of leavers not being replaced and a limited redundancy programme.

Operating profit has decreased by 85% to £6.3m (2008: £41.1m), with underlying operating profit (at constant exchange rates and excluding one-off costs) of £14.3m, a decrease of 65%.

Major markets

All of our major industrial markets saw a significant downturn in 2009 which commenced in November 2008 after one month's strong trading in October. Encouragingly, they have all shown recovery in the second half with average monthly volume run rates up on the average for the five months from November 2008 to March 2009. While it is still too early to judge the extent to which this recovery is due to restocking or a higher level of sustainable demand, it represents a positive trend.

At 425 tonnes, transport sales volume was down 41% on 2008, principally due to a significant decline in automotive sales across all regions. Aerospace sales were also down, but not to the same extent. Second half average monthly run rates were up 36% on the average for the five months from November to March, primarily reflecting stronger automotive sales stimulated in part by government incentive schemes.

Industrial sales volume was down 35% at 614 tonnes against the previous year, predominantly reflecting reduced oil and gas demand. Oil and gas applications proved to be relatively resilient to the economic downturn during the first half although sales have slowed further in the second half. This has been offset by increased sales in other industrial applications resulting in second half average monthly run rates being up 3% compared with the average for November to March.

Electronics sales volume for the year was down 54% at 285 tonnes due to significantly reduced semiconductor and consumer electronic sales. Second half sales volume saw a strong recovery, with average monthly run rates up 40% on the average for November to March in the first half, mainly due to increased semiconductor sales in Asia-Pacific and Europe.

Product and market development

We have continued to generate new business throughout 2009 despite a difficult trading environment. During the year we commercialised 533 new VICTREX PEEK polymer applications with an estimated mature annualised volume ('MAV') of 314 tonnes compared with 723 commercialised applications with an MAV of 487 tonnes in 2008.

At the year end our development pipeline contained 2,942 developments (2008: 2,978) with an estimated MAV of 1,966 tonnes (2008: 2,910 tonnes) if all of the developments were successfully commercialised. As can be seen, we have maintained activity levels, albeit with reduced customer tonnage expectations, largely reflecting the economic slowdown.

In the automotive industry, the pursuit of hybrid technology has intensified as new 'green' and fuel efficient targets are set by governments. VICTREX PEEK continues to be an attractive material to the industry due to the reduction of metallic noise, the potential to reduce costs when combined with other materials in a sub-assembly and increasingly the weight advantage in comparison to metals. Similarly, the focus in the aerospace market on delivering significant weight reductions in passenger aircraft to reduce fuel consumption is providing metal replacement opportunities for VICTREX PEEK utilising its mechanical properties and outstanding flame and smoke emission properties.

In the oil and gas industry, the drive towards increased productivity continues to provide opportunities for VICTREX PEEK which offers the required mechanical performance at extreme temperatures and in harsh chemical environments.

In the electronics industry, VICTREX PEEK offers solutions to end users seeking increased heat and impact resistance and increased mechanical strength, as they improve their products to meet consumer needs in mobile communication and other devices.

We continue to expand our product range to open up new application areas. This year we launched a new polymer, Victrex® ST™ offering increased high temperature resistance and designed to perform in the most demanding environments such as the energy industries where a combination of high temperature, mechanical performance and dimensional stability is required.

Invibio Biomaterial Solutions ('Invibio')

	2009 £m	2008 £m	Change %
Revenue	34.2	24.9	+37%
Gross profit	30.1	21.9	+37%
Operating profit	20.0	14.5	+38%

Invibio had a strong year and generated record revenue of £34.2m, an increase of 37% over 2008 (£24.9m). Underlying revenue (at constant exchange rates) was up 23%.

Sales, marketing and administrative expenses increased by £2.7m to £10.1m, primarily due to targeted investment in resources to drive growth. As planned, Invibio ended 2009 with 47 employees (2008: 33) as a result of its ongoing recruitment programme.

Operating profit increased to £20.0m, up 38% compared to 2008 (£14.5m). Underlying operating profit (at constant exchange rates) was £17.5m, up 21%.

The strong results in 2009 were driven by good growth and continued innovation within spinal applications, both in spinal fusion as well as new developments in motion preservation and dynamic stabilisation. Other strategic markets such as arthroscopy, orthopaedics and cranio-maxillo facial continue to yield success and lay the foundation for future growth. Since its introduction ten years ago, more than 2 million devices containing Invibio's principal polymer PEEK-OPTIMA® have been implanted in patients.

Invibio continues to invest in new technologies and innovations for medical device manufacturers, as was demonstrated by the introduction of our MOTIS® polymer at the American Academy of Orthopedic Surgeons' 2009 Annual Meeting. MOTIS offers orthopaedic surgeons an innovative new option for replacing metal, ceramic and polyethylene components in orthopaedic joint replacement. Invibio's continuing progress in the spinal market was reflected in the receipt of a 2009 Spine Technology Award for Biomaterials as judged by a panel of surgeons.

During 2009, Invibio has entered into 47 additional long-term supply assurance agreements with implantable medical device manufacturers. These agreements were not only with manufacturers based in Europe and the United States, but increasingly in emerging geographic markets such as Asia-Pacific and South America.

Outlook

Group sales volume

At approximately 345 tonnes for the two months to the end of November, Group sales volume has shown further improvement since the year end. It remains too early to tell the extent to which this continues to reflect an element of restocking, but it clearly represents a continuation of the positive volume trend seen in the second half of last year. December sales are expected to be lower than the first two months of the financial year, reflecting the normal seasonal trend, as customers undergo year end shutdowns. We anticipate having a clearer view of the likely level of ongoing demand for 2010 once January sales volume is known, which will be reported in February.

Invibio

Following reduced revenue in the second half of last year, which was principally the result of inventory rationalisation, Invibio revenue is recovering and accordingly we continue to expect further revenue growth in 2010.

Currency impact and gross margin

Trading results for 2010 will be positively affected by the weakening of sterling against our key trading currencies. Based on our forecast trading assumptions, current hedging already in place and spot exchange rates as at 27 November 2009, we currently estimate the following average rates will apply:

	Year to 30 September 2009 Actual*	Year to 30 September 2010 Estimate
US Dollar	1.85	1.60
Euro	1.31	1.13
Yen	181	157

* excluding adverse impact from buy out of surplus forward exchange contracts of £11.3m.

As a result of these improved rates, we expect to see a further significant increase in effective sterling average selling price in 2010 which will have a positive impact on revenue and profit. However, we expect gross margin for 2010 to be broadly in line with 2009 as cost of sales per tonne is forecast to remain at similar levels to the second half of 2009.

Prospects

Anita Frew

Chairman

7 December 2009

CONSOLIDATED INCOME STATEMENT

For the year ended 30 September		2009	2009	2008	2008
	Note	£000	£000	£000	£000
Revenue	2		103,822		141,117
Cost of sales			(39,307)		(49,495)
Gross profit			64,515		91,622
Sales, marketing and administrative expenses			(39,420)		(37,041)
Operating profit	2		25,095		54,581
Financial income		91		577
Financial expenses		(60)		(127)
Net financing income			31		450
Profit before tax			25,126		55,031
Income tax expense			(7,287)		(15,959)
Profit for the year attributable to equity shareholders of the parent			17,839		39,072

Earnings per share
Basic	3	21.7p	47.8p
Diluted	3	21.6p	47.4p

Dividend per share
Interim		5.2p	5.2p
Final	7	14.0p	13.1p
		19.2p	18.3p

A final dividend in respect of 2009 of 14.0p per share has been recommended by the Directors for approval at the Annual General Meeting in February 2010.

CONSOLIDATED BALANCE SHEET

As at 30 September	2009	2008
	£000	£000
Assets
Non-current assets
Property, plant and equipment	129,484	129,909
Intangible assets	10,263	10,873
Deferred tax assets	7,096	8,078
	146,843	148,860
Current assets
Inventories	37,168	31,675
Current income tax assets	1,015	244
Trade and other receivables	15,663	18,195
Derivative financial instruments	1,702	855
Cash and cash equivalents	18,563	23,532
	74,111	74,501
Total assets	220,954	223,361

Liabilities
Non-current liabilities
Deferred tax liabilities	(15,587)	(14,651)
Retirement benefit obligations	(10,831)	(6,378)
	(26,418)	(21,029)
Current liabilities
Derivative financial instruments	(6,303)	(10,455)
Current income tax liabilities	(5,424)	(8,263)
Trade and other payables	(14,582)	(16,820)
	(26,309)	(35,538)
Total liabilities	(52,727)	(56,567)

Net assets	168,227	166,794

Equity
Share capital	831	829
Share premium	21,653	20,723
Translation reserve	2,405	470
Hedging reserve	(1,651)	(5,570)
Retained earnings	144,989	150,342
Total equity attributable to equity shareholders of the parent	168,227	166,794

These financial statements were approved by the Board of Directors on 7 December 2009 and were signed on its behalf by:

D R Hummel Chief Executive

M W Peacock Finance Director

CONSOLIDATED CASH FLOW STATEMENT

For the year ended 30 September		2009	2008
	Note	£000	£000
Cash flows from operating activities
Cash generated from operations	6	26,804	61,858
Interest and similar charges paid		(50)	(176)
Interest received		91	577
Tax paid		(11,156)	(15,703)
Net cash flow from operating activities		15,689	46,556

Cash flows from investing activities
Acquisition of property, plant and equipment		(7,468)	(25,014)
Net cash flow from investing activities		(7,468)	(25,014)

Cash flows from financing activities
Issue of ordinary shares exercised under option		2	7
Premium on issue of ordinary shares exercised under option		930	2,575
Purchase of own shares held		(977)	(858)
Decrease in short-term borrowings		-	(4,207)
Dividends paid		(15,080)	(14,533)
Net cash flow from financing activities		(15,125)	(17,016)

Net (decrease)/increase in cash and cash equivalents		(6,904)	4,526
Exchange differences on net investment translation of foreign operations		1,935	1,886
Cash and cash equivalents at beginning of year		23,532	17,120
Cash and cash equivalents at end of year		18,563	23,532

CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE

For the year ended 30 September	2009	2008
	£000	£000
Net change in fair value of cash flow hedges:
Transferred to equity	(19,923)	(14,509)
Transferred to income statement	25,366	6,719
Exchange differences on net investment translation of foreign operations	1,935	1,098
Actuarial (losses)/gains on defined benefit plans	(7,210)	867
Tax on items taken directly to or transferred from equity	(2,178)	3,238
Net expense recognised directly in equity	(2,010)	(2,587)
Profit for the year	17,839	39,072
Total recognised income and expense for the year attributable to equity shareholders of the parent	15,829	36,485

NOTES TO THE FINANCIAL STATEMENTS

1. Financial statements and basis of preparation

The financial statements have been prepared on the basis of the accounting policies set out in the Group's last Annual Report and Accounts except for the application of relevant new standards.

IFRIC 14 - IAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction was adopted during the year. There has been no impact upon the income statement or balance sheet from this adoption.

A number of standards, amendments and interpretations have been issued during the period and endorsed by the EU, but which are not yet effective and accordingly the Group has not yet adopted. The cumulative impact of the adoption of these standards is not expected to be significant.

The financial information presented does not comprise full financial statements within the meaning of the Companies Act 2006. The results for the year ended 30 September 2009 have been extracted from the full accounts for that period. The Auditor has given an unqualified report on the accounts for this year. The results for the year ended 30 September 2008 have been extracted from the full accounts for that year, which were unqualified and have been delivered to the Registrar of Companies.

Sections of this results statement contain forward-looking statements, including statements relating to: future demand and markets for the Group's products and services; research and development relating to new products and services and liquidity and capital resources. These forward-looking statements involve risks and uncertainties because they relate to events that may or may not occur in the future. Accordingly, actual results may differ materially from anticipated results because of a variety of risk factors which are summarised in note 8.

The accounts for the year ended 30 September 2009 will be posted to shareholders on 18 December 2009 and will be available from the Company's Registered Office at Victrex Technology Centre, Hillhouse International, Thornton Cleveleys, Lancashire, FY5 4QD, United Kingdom.

2. Segment reporting

During the year the Group's business was strategically reorganised into two divisions: Invibio and Victrex Polymer Solutions. Consequently, in compliance with IAS 14 - Segment Reporting, the business now reports divisional information as the primary analysis and geographical information as the secondary analysis. As required by the standard, the comparative figures have been restated and there has been no financial effect of the change on the Group.

Primary divisional segments

Results

	Victrex Polymer Solutions 2009	Invibio Biomaterial Solutions 2009	Group 2009	Victrex Polymer Solutions 2008	Invibio Biomaterial Solutions 2008	Group 2008
	£000	£000	£000	£000	£000	£000
Total segment sales	72,013	34,196	106,209	117,502	24,900	142,402
Less inter-segment sales	(2,387)	-	(2,387)	(1,285)	-	(1,285)
Revenue from external sales	69,626	34,196	103,822	116,217	24,900	141,117

Segment gross profit	34,433	30,082	64,515	69,722	21,900	91,622
Sales, marketing and administrative expenses	(28,157)	(10,042)	(38,199)	(28,618)	(7,404)	(36,022)
Segment operating profit	6,276	20,040	26,316	41,104	14,496	55,600
Unallocated central costs			(1,221)			(1,019)
Operating profit			25,095			54,581
Net financing income			31			450
Profit before tax			25,126			55,031
Income tax expense			(7,287)			(15,959)
Profit for the year attributable to equity shareholders of the parent			17,839			39,072

Other information

Segment assets	203,770	17,184	220,954	210,193	13,168	223,361

Segment liabilities	45,852	6,875	52,727	52,706	3,861	56,567

Capital expenditure	7,100	263	7,363	23,365	356	23,721
Depreciation	8,074	223	8,297	6,786	213	6,999
Amortisation	610	-	610	610	-	610

Secondary geographical segments

	2009	2008
	£000	£000
Sales
Europe	47,211	68,748
USA	45,834	50,717
Asia-Pacific	10,777	21,652
	103,822	141,117
Total assets
Europe	197,588	201,565
USA	14,008	12,385
Asia-Pacific	9,358	9,411
	220,954	223,361
Capital expenditure
Europe	7,310	23,564
USA	17	21
Asia-Pacific	36	136
	7,363	23,721

Analysis of sales by category

	2009	2008
	£000	£000
Product sales	97,685	136,409
Royalty and other income	6,137	4,708
	103,822	141,117

3. Earnings per share

Earnings per share is based on the Group's profit attributable to ordinary shareholders and a weighted average number of ordinary shares outstanding during the year, excluding own shares held.

		2009	2008
Earnings per share	- basic	21.7p	47.8p
	- diluted	21.6p	47.4p

Profit for the financial year		£17,839,000	£39,072,000

Weighted average number of shares used:
Issued ordinary shares at beginning of year		82,897,093	82,227,271
Effect of own shares held		(642,042)	(823,922)
Effect of shares issued during the year		74,814	298,232
Basic weighted average number of shares		82,329,865	81,701,581
Effect of share options		384,567	653,722
Diluted weighted average number of shares		82,714,432	82,355,303

4. Exchange rates

The most significant sterling exchange rates used in the accounts under the Group's accounting policies are:

	Year ended		Year ended
	30 September 2009		30 September 2008
	Average*	Closing	Average	Closing
US Dollar	1.85	1.60	1.99	1.78
Euro	1.31	1.09	1.47	1.27
Yen	181	143	229	189

* Excluding adverse impact from buy out of surplus forward exchange contracts.

5. Share capital and reserves

	Total equity
	£000
At 1 October 2007	141,483
Total recognised income and expense	36,485
Share options exercised	2,582
Equity-settled share-based payment transactions	1,635
Purchase of own shares held	(858)
Dividends to shareholders	(14,533)
At 30 September 2008	166,794
Total recognised income and expense	15,829
Share options exercised	932
Equity-settled share-based payment transactions	729
Purchase of own shares held	(977)
Dividends to shareholders	(15,080)
At 30 September 2009	168,227

6. Reconciliation of profit to cash generated from operations

	2009	2008
	£000	£000
Profit after tax for the year	17,839	39,072
Income tax expense	7,287	15,959
Net financing income	(31)	(450)
Operating profit	25,095	54,581
Adjustments for:
Depreciation	8,370	7,064
Amortisation	610	610
Increase in inventories	(5,493)	(3,808)
Decrease/(increase) in trade and other receivables	2,532	(2,308)
(Decrease)/increase in trade and other payables	(2,726)	1,466
Equity-settled share-based payment transactions	729	1,635
Changes in fair value of derivative financial instruments	444	2,483
Retirement benefit obligations charge less contributions	(2,757)	135
Cash generated from operations	26,804	61,858

7. Dividend and Annual General Meeting

The proposed final dividend will be paid on 26 February 2010 to all shareholders on the register on 12 February 2010. The Annual General Meeting of the Company will be held at 11.00am on 9 February 2010, at the Andaz Hotel, Liverpool Street, London, EC2M 7QN.

8. Risks, trends, factors and uncertainties

Victrex's business and share price may be affected by a number of risks, trends, factors and uncertainties, not all of which are in our control.

The specific principal risks, trends, factors and uncertainties (which could impact the Group's revenues, profits and reputation) and relevant mitigating factors, as currently identified by Victrex's risk management process, are described below. During the year the Group has been impacted by the current economic climate and the measures taken in response, including streamlining the VPS division and reducing production levels, are summarised in the statement above. However, other risks may also adversely affect the Group. Accordingly, actual results may differ materially from anticipated results because of a variety of risk factors, including: changes in interest and exchange rates; changes in global, political, economic, business, competitive and market forces; changes in raw material pricing and availability; changes to legislation and tax rates; future business combinations or disposals; relations with customers and customer credit risk; events affecting international security, including global health issues and terrorism; changes in regulatory environment and the outcome of litigation.

Technological change

Victrex's business is dependent on manufacturing and selling high quality products into advanced applications. Demand for these applications and, consequently, for our products could be impacted as new technologies and materials are developed.

To address this, we employ specialists covering the major market segments for VICTREX PEEK to maintain and advance our skills and knowledge. This enables us to develop new applications for VICTREX PEEK, so that we maintain our position as a leading solutions provider to designers and engineers at our customers and end users.

Operational disruption

The Group's business is dependent on the ongoing operation of our various manufacturing facilities. A significant operational disruption could adversely affect our ability to make and supply products.

As a result, we have implemented policies and procedures to safely manage all our operations and maintain our supply of VICTREX PEEK to customers. In particular, we employ a dedicated and empowered Safety, Health and Environment ('SHE') department to assist line management and to provide expert guidance.

We hold significant stocks of raw materials and finished goods which should enable us to maintain supplies during any short-term disruption. Furthermore, the second VICTREX PEEK manufacturing plant is able to operate independently from the first plant, thereby reducing the impact of any operational disruption on our ability to continue manufacturing products.

Insufficient capacity

Our customers' businesses depend on maintaining a consistent supply of high quality products. Any unexpected upsurge in demand could lead to insufficient capacity to fulfil customers' needs; additionally any delays in the implementation of major capital expenditure programmes could create a capacity shortage, leading to customers seeking alternative products.

To mitigate this risk, our stocks of finished goods enable us to supply any short-term surge in demand from our customers. Additionally, it is our policy to keep capacity well ahead of demand, by investing in our supply chain, so that our customers can be confident that we can meet their requirements.

Product specifications

The Group's products are used in highly demanding end use applications. Any failure to supply products in accordance with their specifications could lead to loss of business and, potentially, a product liability claim.

To mitigate this risk, VICTREX PEEK is manufactured within a quality management system approved to ISO 9001:2000. Invibio PEEK-OPTIMA polymer is additionally manufactured within the requirements of ISO 13485:2003, a system of good manufacturing practice often used by the pharmaceutical industry and by medical companies.

Competitor activity

Victrex operates in competitive markets, both in terms of competitors offering directly comparable materials (other polyaryletherketone products) and alternative materials. Failure to compete successfully could negatively impact the business.

Accordingly, we are continuing to work closely with our customers to provide high quality products as required and to invest in resources to bring cost effective, high quality application solutions to our customers.

Currency exposure

Currently, the Group exports 96% of sales from the UK. Primarily, these sales are denominated in US Dollar, Euro and Yen. Fluctuations in exchange rates between sterling and these other currencies could cause profit and balance sheet volatility.

The Group hedging policy to mitigate this risk is to defer the impact on profits of currency movements by hedging:

a minimum of 90% and a maximum of 100% of projected transaction exposures arising from trading in the forthcoming six month period and,
a minimum of 75% and a maximum of 100% of projected transaction exposures arising in the following six month period.

Profitability can nevertheless vary due to the impact of fluctuating exchange rates on the uncovered portion of the transaction exposures and from revised forecasts of future trading, which can lead to an adjustment of currency cover in place.

Relationships with customers and suppliers

We have essential relationships with our customers, suppliers, employees, shareholders and the environment. All our relationships are managed in accordance with the Group's global ethics policies. Relationships with our customers and suppliers are described in further detail below:

Customers

Our customers are a combination of polymer processors and end users located worldwide. We have long-term supply assurance agreements in place with all of the implantable medical device manufacturers that comprise Invibio's PEEK-OPTIMA polymer customers. These agreements guarantee the specification of and production methods for the biomaterial over the term of the agreements. We also have supply agreements in place with some major processing customers and supply to other customers on an order by order basis in accordance with the Group's applicable terms and conditions of sale. The loss of a major processing customer or a worsening of commercial terms could have a material impact on the Group's results, accordingly we devote significant resources to supporting our customer global ethics policies, including maintaining regular contact with major customers and undertaking surveys of customer satisfaction.

Suppliers

In 2005 we completed the purchase of the operations of Degussa AG relating to the manufacture of BDF (the key raw material from which VICTREX PEEK is produced). The provision of other key raw materials and services remain essential to the operation of our various manufacturing facilities and we seek to maintain appropriate contracts, where available, with suppliers for the supply of key raw materials. In addition to the steps taken to manage the risk of operational disruption caused by a shortage of key raw materials described above, we devote significant resources to maintaining our supplier relationships to ensure they continue to operate satisfactorily, including regular audits of and performance reviews with key suppliers.

RESPONSIBILITY STATEMENT OF THE DIRECTORS IN RESPECT OF THE ANNUAL REPORT AND ACCOUNTS

The Directors confirm that to the best of their knowledge:

The Group and Parent Company's financial statements, prepared in accordance with applicable UK law and in conformity with IFRS as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole and,

The management report, which comprises the Director's Report and the Annual Business Review, includes a fair review of the development and performance of the business and position of the Company and the undertakings included in the consolidation as a whole, together with a description of the principal risks and the uncertainties they face.

By order of the Board

Michael Peacock

Finance Director

7 December 2009

INDEPENDENT AUDITORS' REPORT TO THE MEMBERS OF VICTREX PLC

We have audited the financial statements of Victrex plc for the year ended 30 September 2009 set out on pages 32 to 63. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the EU and, as regards the Parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2006.

This report is made solely to the Company's members, as a body, in accordance with sections 495, 496 and 497 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an auditors' report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members, as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of Directors and auditors

As explained more fully in the Directors' Responsibilities Statement set out on page 29, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's (APB's) Ethical Standards for Auditors.

Scope of the audit of the financial statements

A description of the scope of an audit of financial statements is provided on the APB's web-site at www.frc.org.uk/apb/scope/UKP.

Opinion on financial statements

In our opinion:

the financial statements give a true and fair view of the state of the Group's and of the Parent Company's affairs as at 30 September 2009 and of the Group's profit for the year then ended;
the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the EU;
the Parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU and as applied in accordance with the provisions of the Companies Act 2006 and,
the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation.

Opinion on other matters prescribed by the Companies Act 2006

In our opinion:

the part of the Directors' Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006 and,
the information given in the Directors' Report for the financial year for which the financial statements are prepared is consistent with the financial statements.

Matters on which we are required to report by exception

We have nothing to report in respect of the following.

Under the Companies Act 2006 we are required to report to you if, in our opinion:

adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or
the Parent Company financial statements and the part of the Directors' Remuneration Report to be audited are not in agreement with the accounting records and returns; or
certain disclosures of Directors' remuneration specified by law are not made; or
we have not received all the information and explanations we require for our audit.

Under the Listing Rules we are required to review:

the Directors' statement, set out on page 18, in relation to going concern and,
the part of the Corporate Governance Statement relating to the Company's compliance with the nine provisions of the June 2008 Combined Code specified for our review.