Victrex PLC

LSE:VCT

Earnings Call Transcript 2020-Q3

[Operator]

Hello, and welcome to the Victrex Q3 Interim Management Statement, July 2020. [Operator Instructions] And just to remind you, this conference call is being recorded.Today, I'm pleased to present Jakob Sigurdsson, CEO. Please go ahead with your meeting.

[Jakob O. Sigurdsson, CEO & Executive Director]

Thank you, and good morning, everybody, and welcome to Victrex's Interim Management Statement for the Third Quarter which covers the period from the 1st of April to the 30th of June. So I'm Jakob Sigurdsson, CEO, and I'm joined on the call by Richard Armitage our CFO; and Andrew Hanson, our Head of Investor Relations. So we will start with the headline summary. Richard will then cover the financials, and I will then come back and discuss the mega-programmes and our outlook before we turn it to Q&A towards the end.So in summary, the third quarter saw a solid start in April but are weak currently, as we were impacted by COVID-related headwinds across several markets, particularly during May and June. One key point to note though is that on a year-to-year basis, our group volumes are broadly in line with the prior year. Although we should note that Q3 last year was relatively weak.At a value level, revenue is down 3% on a year-to-date basis, primarily as mix weakened, reflecting the impact of procedure deferrals in our Medical business where revenues have been down up to 40% in the quarter, although market indicators do suggest a gradual returning later in the year.Whilst today's announcements covers volumes and revenue, one key point I would like to stress, which will impact margin this year and into next, is the under-absorption of fixed cost from lower production volumes. Richard will add more color to this in his summary of financials.And I'll hand it over to Richard at this stage. Richard?

[Richard J. Armitage, CFO, Group Finance Director & Director]

Thank you, Jakob, and good morning to everyone. As Jakob has noted, on a year-to-date basis, our volumes are broadly in line with the prior year. But in revenue, we were 3% down, as mix was influenced by a decline in Medical sales as a consequence of the rapid deferral of elective surgeries globally in the wake of COVID. Mix will continue to be a key aspect in considering our profitability during the remainder of FY '20.Overall, Q3 group sales volume was down 12% to 805 tonnes versus 912 tonnes in the prior year, with group revenue down 18% to GBP 58.8 million versus GBP 72 million in the prior year. As noted, mix was a key driver with Medical revenues at approximately 40% lower in quarter 3.Looking at this trend month-by-month, we have seen a relatively stable performance and volume level in April, but with group volume and revenue then declining to more than 20% below prior year in May and June, as we started to see the impact around our COVID-related headwinds. As we enter our quarter 4, we'd expect that 20% decline to be maybe slightly worse, given that Q3 had started well and that the macro outlook for end markets over the next quarter remains weak.By end markets, Aerospace, Automotive and Energy experienced the greatest level of decline, with performance being moderately weaker than market indicators would suggest. As a reminder, we have previously noted IHS forecasts of a minus 22% decline in Automotive production in calendar 2020 and projected build rates for the Aerospace OEMs down by circa 30%.Our Value Added Resellers business remained in growth for the quarter as a whole. There'll be some softness appearing as the quarter progressed. We also saw growth in Medical non-implantable and other Industrial, as PEEK remains important for many life-sustaining applications and critical industries.Turning to Medical. After a strong finish in March, we saw the anticipated deferral of elective procedures impacting us from April, although market indicators suggest procedure deferral will gradually reverse. Jakob has talked previously of surgeries gradually resuming in Asia. And indicators suggest the U.S. is likely go back to 100% of elective surgeries by the end of the calendar year, although we will remain cautious at this stage. As is evident from our performance in Asia over recent years, demand has remained robust, and continued growth in non-Spine has kept year-to-date Medical revenues ahead of the prior year in that region.I'd like to highlight again the impact of under-absorption of fixed costs within the P&L from lower production volumes. There will be an impact on margin for the second half of this year and into FY '21 given the expected lower production demand. On this point, firstly, please bear in mind that in the first half, we produced around 1,600 tonnes versus a sales volume of 1,992 tonnes. In the second half, with demand weaker, our production will be lower still, yet our cost base is relatively fixed. This brings an expectation of sequentially lower margin in the second half.Secondly, we do intend to proceed with our debottlenecking projects in FY '21, which is an effective use of capital to gain incremental capacity and support our long-term growth programs. This project requires around 25% of our polymer capacity to be offline, so production will again be lower than sales volume, with a reduction in inventory filling the gap. This will also allow us to start to unwind our Brexit inventory.On a more positive note, we do see that once demand returns to more normalized levels, there should be a benefit from operating leverage. Having implemented a number of cash conservation measures in response to the COVID outbreak, we are now examining further cost actions aimed at addressing our fixed cost base. We expect to update on those later in the year.And finally, a brief word on cash. Our net cash position at the end of quarter 3 remained healthy at GBP 72 million, which includes GBP 8 million ring-fenced for our China manufacturing subsidiary. In addition, we have available or committed GBP 20 million RCF together with a GBP 20 million uncommitted accordion.Thank you, and I will now hand back to Jakob.

[Jakob O. Sigurdsson, CEO & Executive Director]

Thank you, Richard. And also briefly, I would like to touch on the longer-term mega-programmes as well. As we said in May, we are mindful that COVID-19 may lead to some delays in achievement of milestones in certain projects and are monitoring developments closely through our COVID lens, if you wish. But overall, our growth pipeline is progressing broadly as planned, with a long-term value proposition for the use of PEEK remaining strong, delivering performance benefits and solving problems that incumbents are not able to do.One program we have seen some active developments on in recent months is Magma. Our testing data points for TechnipFMC have indicated PEEK as a preferred material of choice for demanding conditions in Brazil, which follows Victrex manufacturing the 6-inch PEEK liner pipe as well as the supply of PEEK composite tape in support of TechnipFMC's qualification program.Whilst this is great feedback, you should note that the qualification program still has around 18 months or so to run, and firm outcome will not be known until towards 2022. But it's worth keeping in mind that this program is about delivering performance benefits against steel in Brazil deepwater, where it's a high CO2 shale gas and the technology -- and is a very technology challenging environment in every aspect. But yet, we had a great progress. On the Knee program, as you -- many of you will recall, if it weren't for COVID, we would have a human with a PEEK-based knee already by now. But obviously, those procedures have to be postponed until the early part of the year. But we're now looking forward to reaching that significant milestone, hopefully, before the end of our financial year.Turning to the outlook. As we said in May, with additional impact in our current and former order book from COVID and with macro and end market uncertainty, we're not providing specific guidance on full year expectations. I would repeat what we have covered, however, at lower production levels and consequently the under-absorption of our fixed costs together with a weaker mix will impact margin further in the second half and most likely into FY '21 as well. Although as referred to already, we will be reviewing further cost actions to help here. Although market indicators remain negative across many of our end markets as we move into our next financial year, we do anticipate being in a better position later in the year to assess the outlook.So with that, thank you, and we'll hand it over to questions and answers.

[Operator]

[Operator Instructions] Our first question comes from the line of Kevin Fogarty from Numis Securities.

[Kevin Christopher Fogarty, Analyst]

Just a couple of questions. Could you help us a little bit in terms of the outlook, just in terms of what you're seeing by sector, just in terms of sort of volume outlook? Obviously, you've kind of alluded to being more challenging in the fourth quarter. So just wondered if you could help us a little bit on that. Just in terms of the cash position, could you sort of help us understand how inventories have moved during Q3?And finally, at the half-year stage, you talked about planning for a number of downside scenarios. I just wondered if you have tested and we would see a downside scenarios in the last 3 months. Or do you kind of feel the need to think about more severe downside scenarios than we previously thought?

[Jakob O. Sigurdsson, CEO & Executive Director]

Yes. I think on the last point, if I may start with that. I think in the downside scenarios, I think they are pretty much bracketed right now at what we talked about in the release of the earnings for the first half. So we're not expecting it to be worse in the time frame that was covered in there. I think it is, as I said, pretty well bracketed in that one.Now if we look at the assumptions for end markets, and then Richard will give you an overview of the cash position and the inventory position. Then on Auto, looking like the production for the year is likely to bottom out just below 70 million cars. And remember, this is coming from a level in 2018 where the market was close to 100 million cars, just 98 million or so in terms of light vehicles. So this is a 30% reduction from the 2018 levels, and that's sort of pretty much what we are factoring into our forecasts.Aerospace is not looking much better either. Airbus did cut production by 1/3 in April. Then Boeing has cut production for the 787 for '21 and 2022. On the positive side, it looks like 737 might go back into production as well. But in any event, we're looking at a reduction here that is sort of comparable to what we indicated in our scenario analysis and our stress testing after the first half. So no improvement from that point, but not a deterioration either. So as I said, I think our base assumptions as it relates to those key markets are valid. And remember that we put forward figures there for each of Auto, Aero and Energy, expecting a significant decline. We might be slightly better than that, but I think we're more or less in the range that we did in the stress testing.Now on the positive side, sure enough, we've seen the reduction in the third quarter and would expect a continuation into the fourth quarter in our financial year. As it relates to impact on Medical, we'll probably reach the trough there, and we're starting to see indications of a slow recovery. But quarter-on-quarter, year-on-year, we will still expect a decline in Medical turning back into positive territory in our first financial quarter of next year and into the second quarter as well. And this is sort of based on market assumptions about the drop in the rate of elective procedures for the second calendar quarter and the third calendar quarter in the U.S. predominantly. Richard, if I hand it over to you for inventory and cash.

[Richard J. Armitage, CFO, Group Finance Director & Director]

Thanks, Jakob. So inventory is sort of trending roughly flat, so there was a GBP 95 million in the first half, and that's still very roughly where we are. Cash is better than expected at GBP 72 million. We -- because the impact of COVID was later than we had anticipated in our stress testing in April, our cash generation has been a little bit better. We had also anticipated that -- we have planned for the possibility of disruption to our receivables, even in the form of debt that is for extended terms, and there has been very little of that. So generally, our cash generation is strong. Inventory for now, relatively stable. So that's all in a fairly stable place.

[Operator]

And the next question comes from the line of Sebastian Bray from Berenberg.

[Sebastian Christian Bray, Analyst]

I have 2, please, both on profitability. I appreciate Victrex does not provide direct statements on group profitability on a [ full-year ] basis. But if I may phrase a question a little differently. If on a PBT level, Q4 is identical to Q3, is the company able to hit profit before tax expectations for the year?And in terms of the drivers of reduced margins, what is bigger in H2, negative operating leverage because of the under-absorption of fixed costs or the mix effect in Medical?

[Richard J. Armitage, CFO, Group Finance Director & Director]

Sebastian, it's Richard. So we -- I mean you're right, we really like to give PBT by quarter. And at the moment, we are not giving guidance for the year. And I really wouldn't want to call out Q3 in isolation because there are some very unusual effects there. We are anticipating being relatively close to consensus, but that's as far as I'm going to go at the moment. And I would stress the point, there is still uncertainty in quarter 4 and not being able to think about how Medical evolves, for instance. So that's as far as I'm going to go on PBT.In terms of the mix impacts in quarter 3, the impacts of those 2 drivers suit us fine, were probably roughly equal, actually. And I think the important point to make, as Jakob has indicated, that we would anticipate some stabilization in Medical probably starting to recover procedures around the world by the first quarter of next financial year. So as we go into next year, we would expect the under-recovery driver to be more pronounced than the Medical impact, if that helps.

[Sebastian Christian Bray, Analyst]

It's helpful. And a third quick follow-up. Can you put some light on why the other value-added or Value Added Resellers, as they're called, seemed to have, well, outperformed several of the underlying markets? Are there booking effects here? Is PEEK just simply too valuable to switch out? What is your own view on this?

[Jakob O. Sigurdsson, CEO & Executive Director]

Yes. I think on a performance basis, you do not switch PEEK out of applications based on relative pricing in tough times. It is very often qualified and spec-ed in into highly critical applications. So both for performance reasons and obviously because of specifications, that does not tend to happen.I think the -- remember that, and it's worth putting it in context, we were coming off a mini recession, if you wish, in 2019, with Automotive, in particular. Energy as well, and some early signs of a slowdown in Aero was hitting the market. So we were -- in the first quarter of a financial year and actually into a second quarter as well, we were on a road to recovery. So the inventory pipeline at Value Added Resellers and downstream from them was fairly low. Now I think it remains fairly low throughout the first and the second quarter. I think as a part of COVID, there was probably a number of contingency plans that kicked in. And we know that a number of downstream players increased their safety stocks. So whilst in the early days of COVID, everybody was worried about supply. Then I think the relatively dry supply -- relatively dry level of inventories in the chain downstream from Value Added Resellers probably needed some refill, if you wish. So I think we saw that and that, therefore, for a longer and more sustained period in that business than in others. So I think that explains the fact.And we're aware of the fact, some regions as well, people have, as a consequence of COVID, increased the level of safety stock, particularly when you're dealing with long global supply chains. So that in the end -- in the event of a second wave, they wouldn't be as exposed from a supply perspective as they otherwise would be. So I think that is the main explanation for that, and as well that the exposure of Value Added Resellers sort of by and large is probably not as dependent on Auto and Aero as our direct sales would be. So I think these 2 things probably explain the difference in that.

[Operator]

And the next question comes from the line of Chetan Udeshi from JPMorgan.

[Chetan Udeshi, Research Analyst]

A couple of questions. Firstly, on the ASP decline, can you maybe help us understand what is the decline on a constant currency basis? And is that entirely due to mix because it does feel quite, quite high in terms of year-on-year change? And the second question, I was just looking at, say, where the numbers are for this year broadly on revenue terms. We are similar to what we had in 2016, '17 timeframe. But if I look at the gross margin, it is assuming declines in second half, as you've guided, and we are talking about closer to 56% gross margin this year versus 63% that you did on the similar revenue base in '16 and '17. So what has changed so much in these years for gross margin to be down so much? That will be useful.

[Richard J. Armitage, CFO, Group Finance Director & Director]

Yes. So we are looking at ASP in the second half being around about 2% to 3% below the first half, if that's a helpful indicator. And that is due to mix. The main driver is Medical. And as we noted that those are 40% decline in quarter 3. There is also a small element of the Value Added Resellers in there because those were slightly lower than average ASPs. And as we noted, sales have held up through the third quarter. So hopefully, that gives you a feel on selling price.I think on margin, there's 2 or 3 things to note in here. So firstly, don't forget that's in the time period that we're talking about we've moved to the IFRS 9 approach, the presentation in the accounts. That change in methodology reduced gross margin in the year of implementation by 2 percentage points over that period. It's probably a little bit more than that. So probably a little bit less than half the impact you've seen there is due to IFRS 9. And I think then there's also going to be a mix effect. So we have seen relatively stable Medical volumes, and then we've seen Industrial take a bigger share of the mix. So I think there's a mix effect there. And then there has been some degree of inflation in our operational costs over that period, which also will be impacting margin. So that's got to be more detailed analysis to hand. I think those are the 3 drivers, Chetan, if that helps.

[Operator]

[Operator Instructions] Our next question comes from the line of Mubasher Chaudhry from Citi.

[Mubasher Ahmed Chaudhry, Vice President]

Just 2, please. I don't think you mentioned anything on the Gears program. Could you provide some color on where that is and what the progress has been? And do you expect that to be pushed out further, given the weakness that we're seeing in Autos from your previous expectations? And the second question is around on the CapEx. Could you provide some color around the CapEx profile for the next -- for 2020 and 2021, please?

[Jakob O. Sigurdsson, CEO & Executive Director]

Yes. So on Gears, we do have in excess of 15 programs ongoing right now with SOPs starting in '21 through to '23. And clearly, we are assessing any potential impact on that with each of the OEMs as we go through it. The ability for them to carry out the testing protocols under the current conditions and the like and whether there is any change in priority of those respective programs, that is something we're monitoring on an ongoing basis. And we haven't seen any indications of sort of any major setbacks in that. The value proposition holds quite well. Remember, this is all about noise and vibration reductions combined with lightweighting. It actually has a cost benefit as well on a like-for-like basis compared to steel. So the value proposition is strong. Some might even say somewhat stronger in light of the increased emphasis on the environment as a consequence of COVID. But those programs remain on track. But as I said, clearly, a lot of the OEMs these days are going through their R&D portfolios and trying to assess and decide which one they're going to carry forward and which one they're not going to carry forward. But so far, those 15 are more or less on track. As it relates to CapEx, Richard do you want to add color to that?

[Richard J. Armitage, CFO, Group Finance Director & Director]

Yes. So I think our guidance on CapEx for this year is as it was at the interim, so around about GBP 15 million, maybe slightly more than that. For next year, we're continuing to invest in our joint venture in China. We intend to carry out debottlenecking projects in the U.K. And there are a couple of other sort of growth-related investments we do intend to continue with. So we could see capital going up to about GBP 50 million during FY '21.

[Operator]

And the next question comes from the line of Andrew Stott from UBS.

[Andrew Gregory Stott, Managing Director and Research Analyst]

I just had a question. It was just on Medical, actually, just to understand a couple of things. So 40% for the quarter was a volume number, first of all, and is that all related to the Medical delays -- sorry, the medical surgery delays specifically? Or are there other weaknesses within Medical? So that's the first question. And Richard, in your comments, you mentioned that the second half, you are led to believe by some of the external consultants that you'd see some of those surgeries come back, if not all, but you choose to be conservative. I'm just wondering how you do catch up like practically because one assumes there's only few hours in the day for the surgeons themselves. So it's sort of thinking about the practicalities of that catch-up process. Yes. Those 2 questions.

[Jakob O. Sigurdsson, CEO & Executive Director]

Yes. So basically, it is similar, as it turns out, both from volume and value for Medical. So you can take it either way. But I guess you were more after the value piece of it. So the impact is around 40% in each of volume and value. And then if we look at the run rate, so industry sources would tell us that elective procedures were roughly down 70% in the U.S., which is a major market for this in the second quarter, second calendar quarter, forecasted to be around 40% down in the third calendar quarter. And then there is an expectation within the industry that it will recover in the fourth calendar quarter of this year and the first calendar quarter of next year.So what's the logic behind that? Well, these are elective surgeries, so even if they're not performed under COVID situations, then the problem doesn't go away, number one.The second question then relates to do you have capacity to carry out a greater number of procedures than you would do in the previous comparable quarters, and the answer to that is yes. So the base assumptions from industry sources is that the industry has capacity, both in terms of equipment and human resources, if you wish, to do, as an example in this context, something close to 120% of what they did in the corresponding quarter the year before. So if Q4 out of the quarter 2019 was at 100%, the industry is assuming that it might go as high as 120%, 125% for Q4 in 2020 and similar rates in the first calendar quarter of 2021. So these are sort of the base assumptions behind this, Andrew.

[Andrew Gregory Stott, Managing Director and Research Analyst]

That's useful. And just carrying on from that, considering your comments on margin, so your September year-end, your first quarter of your new financial year '21, will, therefore, have a boost from medical on the lines of what you just said. So naturally, you'd expect, from a modeling perspective, your gross margin is higher in the first half '21 before we consider everything else, right, before we consider OpEx from China and whatever else. So why in the statement are you talking about first half '21 margins being lower? That's my puzzle at the moment.

[Richard J. Armitage, CFO, Group Finance Director & Director]

So Andrew, I think what we're indicating there is the potential for production volume to be a little lower, and therefore, the under-recovery of overhead effects to be a little higher. Clearly, that's dependent on how demand emerges. And we have signaled that if we think that situation is developing, then we're also going to look at our fixed cost base, and we're considering options to do that. But that is the reason for that indication, if that helps.

[Andrew Gregory Stott, Managing Director and Research Analyst]

Okay. So it's just simply the total volume number rather than the unit margin mix, if you like.

[Richard J. Armitage, CFO, Group Finance Director & Director]

Yes.

[Operator]

And the next question comes from the line of James Tetley from Nplus1 Singer.

[James Colin Tetley, Deputy Head of Research]

You might have covered it before, but I've just been thinking about your currency and hedging policy. And are you left with the -- to be at volume decline with an over-hedged position? And if so, is it significant, given where rates are at the moment? Is it positive or negative? And if it's significant, would it be treated as an exceptional item?

[Richard J. Armitage, CFO, Group Finance Director & Director]

It's simply a good note. So as you're aware, we are currently covering at 80% for 6 months out and then 75% for the next 6 months. Given that we were able to anticipate to some degree the volume decline in the second-half of this year and going into next year, we were able to moderate our hedging to a reasonable degree. So we don't expect a particularly material impact. There will be some but not hugely material. We had actually, just as a sort of slight point, held onto U.S. dollars to pay for our investment in China as well. So that's helped with a little bit of sort of mitigation there.

[Operator]

And the last question comes from the line of Martin Evans from HSBC.

[Martin John Evans, Analyst of Global Chemicals]

Just following on from Chetan's question about what might or might not be changing going forward, and I get the under-recovery of overhead argument and so on. But thinking back to previous demand shocks, you always bounce back quite strongly in terms of volume and profits and margin. But do you think this time, it's going to be different? Because with sort of over 2/3 of your end markets in relative distress, I'm thinking obviously about Aerospace, Oil, Energy and Auto, is that there will -- part of your value proposition might be challenged by them such that you basically have to start cutting your prices to maintain business because they're under such pressure themselves. Or do you think they will continue to sort of, once things pick up, continue as before?

[Jakob O. Sigurdsson, CEO & Executive Director]

No. I think you're absolutely right, Martin, that in previous recessions, volume has come back both hard and fast. I think our base assumption is that it might not come as hard and fast back this time around. Sure enough, if you look at PMIs around us these days, they are recovering quite sharply, so that will give some reason for at least a moderate sense of optimism. But I think at the end of the day, it will be interesting to see what and how that translates into consumer confidence, ultimately, because that is really the key measure of whether we're going to start to see a sustained recovery or not. And I don't think we've seen all the macroeconomic data to be able to bank on that.Sure enough, if end customers are in distress and difficulties notably Auto and Aero, in theory, you'd be right. But I think you also got to look at the size of and the significance of our technology in the steam of their overall business and the totality of the problems that they're faced with and, clearly, the value that our technology is bringing. And if you weigh all of that on a scale, then I'm not sure that PEEK would be on the top of the priority list there, given the critical nature of the performance of PEEK and the fact that there is a lot of work associated with trying to replace it, even if you try to replace it with competitive materials.So I think the longer-term value proposition of the technology is still strong in every aspect. And some might say that post COVID and I think post recalibration in a lot of different industries where there's an increased emphasis placed on more environmentally friendly technologies, then one would argue -- as you see and indicated in many of the stimulus packages being put forward by governments right now which are emphasizing investments in green technologies, one would argue that we might be even better placed when we get out of this. And we will get out of this. So the long-term publication of PEEK remains strong. Some would even say stronger. So I think once we navigate this relatively short-term rapids, if you wish, then I think we'll come stronger out of it at the other end. And our key focus is on navigating these short-term challenges and not losing sight of the longer-term value proposition that is embedded in PEEK.

[Operator]

And the next question comes from the line of Navina Rajan from Morgan Stanley.

[Navina Rajan, Research Associate]

Just wanted to sneak in a couple of questions at the end. The first one is just on your dividend. I know that you -- it's contingent on macroeconomic outlook and you're not giving any more guidance. But can you just give us some color on sort of the capital allocation priorities for the company? Note that you're carrying out your CapEx for FY '21 still, so just where the dividend sort of fits in with that. And then just my second question, and if you can provide any more color on currency expectations. I think at H1, you said that expecting for the full year sort of a GBP 6 million to GBP 7 million tailwind at PBT pre-COVID. And if you can give us any update on that, that would be also useful.

[Richard J. Armitage, CFO, Group Finance Director & Director]

It's Richard. So I think on dividend, our position remains unchanged on that. We are going to assess the outlook and the market conditions later in the year before reaching a conclusion on the dividend recommendation in relation to FY '20. If you remember those at the interims, we indicated that the interim dividend decision had been deferred. That doesn't mean it's been canceled, just that we would review it later in the year.At the moment, we do have potentially significant capital plans for FY '21 that we would like to progress with. Those are all underpinning growth opportunities. But we also would like to be in the position to pay a dividend. So we're certainly not in an either/or kind of position. And in relation to both of those, I think we're going to wait until we get to later in the year and assess the market outlook and our cash generation.On currency, as you'd expect, that tailwind has declined slightly, so we're probably a little bit under GBP 5 million at the moment. As I noted earlier, we had covered forward for the balance of the year. We're not materially overcovered. But with other volumes, you'd expect that, I think, to be lower, so something a little under GBP 5 million.

[Operator]

And we have another question from the line of Maggie Schooley from Stifel.

[Margaret Rose Schooley, Analyst]

And following on from Martin's question, which might be slightly premature. But with the election looming in the U.S. and when if it [ affects your ] larger market in Medical, do you think a change of presidency will negatively affect high-end procedures like spinal, as perhaps a democratic president would have a more universal approach to healthcare? Or do you think this won't affect your platform in Medical in the U.S. at all?

[Jakob O. Sigurdsson, CEO & Executive Director]

Excellent question, Maggie. And I have always been focused to try to stay out of politics, but I find it difficult as such, definitely. I think we could talk for hours on this one. But there's clearly been quite a big set of reforms under the previous government in this regard on the Obama. So there's been quite a lot of reform from that. I think as it relates to ourselves, we're not necessarily expecting a large change here as it relates to impact on our base business. So no, I think we have seen and we did see a change after Obamacare. And -- but I think as it relates to our area, we do not have a reason to believe right now at least that there would be a significant change resulting from a Biden presidency. Hopefully, we'll get away from tricksy tweets. But as it relates to this, no, not necessarily expecting that.And I think it is maybe worth pointing out that given the growth that we're seeing in Medical, our dependency on the U.S., as such, is declining. We're seeing rapid growth in China and in Europe in the spinal area and -- yes, particularly in Spine.Just to put it in context, roughly where Medical in Asia was way less than 10% of the business, it's now crawling above 20%. And we see significantly higher growth rates out there than we see in the other parts of the world. So dependency on the U.S. is actually less than it ever has been, and it is declining relatively rapidly.

[Operator]

And as there are no further questions, I'll hand it back to the speakers.

[Jakob O. Sigurdsson, CEO & Executive Director]

So thanks, everybody, for joining us today. Fair enough, as you're well aware of and see in other industries and with other companies, these are unprecedented times, to use a phrase that is, I guess, used quite often these days.But I think the key thing to take away is that we're navigating these times carefully. We're navigating them well. Sure enough, it has a short-term impact on our business. But the long-term proposition for PEEK remains strong and maybe some would say even stronger as we emerge from this crisis. And as you study sort of the adaptation of disruptive technologies over time, one finds that they very often sort of get the spot that they need in the aftermath of large shocks and the aftermath of a relatively large crisis. And I think that argument could be used for some of technologies that we are bringing to market, that there is a reason to believe that there might be a catalyst embedded in all of this that paves the way and moves barriers to adoption in a different way than even we might have anticipated and were chosen.So again, we're navigating with caution. We're well-equipped to navigate it. We're in a sound position. It will be a rough period still for a couple of quarters at least. But at the end of it, whenever that is, we'll emerge from this stronger than when we went into it.Thanks for your time today.

[Richard J. Armitage, CFO, Group Finance Director & Director]

Thanks, everyone.

[Operator]

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