Renishaw plc (OTCPK:RNSHF) Q4 2022 Earnings Conference Call September 15, 2022 5:00 AM ET
Company Participants
Chris Pockett – Head of Communications
Will Lee – Chief Executive
Allen Roberts – Group Finance Director
Conference Call Participants
Chris Pockett
Good morning, everyone. My name is Chris Pockett, and I’m Head of Communications for the Renishaw Group and I’d like to welcome you to this live webcast presentation of Renishaw’s preliminary financial results for the year ended June 2022.
Before we start today’s event, I’d like to read a short statement on behalf of the company. We are deeply saddened by the passing, Her Majesty the Queen and we would like to offer our condolences to her family and friends at this very difficult time. She was a remarkable woman, whose hard work, dedication, compassion and integrity over more than 70 years of service, shown through and gained a huge respect around the world. Rest in peace, your majesty.
Today’s presenters are; Will Lee, Chief Executive; and Allen Roberts, Group Finance Director. Before I hand over to Will, I’d like to go through some basic housekeeping for the event. After the presentation, which will last around 25 minutes, so David McMurtry, Executive Chairman, will join Will and Allen for a question-and-answer session in which we will try to answer as many questions as possible before we close at 11:00. No questions will be answered during the formal presentation.
However, you will be able to submit questions both during and after the presentation via the question icon that you can see on the control panel on the right of your screen. I should also point out that all financial information given during this presentation will be in pound sterling. Thank you again for joining this webcast event and I will now hand over to Will.
Will Lee
Thanks, Chris. So let’s like start looking at the financial summary of last year. So good news around here, lots of record, revenue up 19%, adjusted profitable tax, up 37% and end of period cash up by 18%. Start with, if we have a look at the revenue then very much a similar story to hear for the underlying drivers as to what we talked about at the half year, semiconductor, electronics remaining strong and the other markets really starting to catch up throughout the year. We also saw across the regions a strong growth. So it’s nice to see all the different regions are continuing to grow as they have been.
And most pleasing was the ability of our manufacturing and our design teams to overcome the challenges that we experienced, particularly with the well-publicized supply chain challenges around the electronics industry. We did see a number of challenges and all the occasions we’ve managed to keep production going by engineering change, designing an alternative components: a great effort there by the team.
What we have seen is, delivery times increased throughout the year, but we have now actually in a place where the delivery times are coming down and are really allowing us to exploit the opportunities that are out there in the market. And I think just to summarize and finalize on this, the most pleasing thing about the revenue growth we’ve seen here is, really we start to see the benefit of the hard work of the new accounts that we have gained, the full impact of them coming through is the markets have improved. So, a really positive set of results, reflecting all the hard work that’s going on across the group.
So if next, take a look at the group profitability, a record profits of £163.7 million. Then probably really important here is to have a look at some of these well-publicized inflationary pressures that everyone is feeling and the impact that they have had on us. You can see some of the details in the bottom right here, if we look from a positive point of view that, yes, we have seen rising input costs into manufacturing. But actually, if you look at the productivity measures that we have put in place, these are very much offset those increases.
We had as we talked about last time we gave an update, seen increasing salary costs, both from a rising headcount as we invest future and also pay benchmarking. So that has come in across the board has increased salary costs for the year.
We’ve also seen some impacts from some of the geopolitical uncertainty that’s going on. And we did immediately stop shipments to our office in Russia. And we have now actually closed our offices in Moscow and in Perm.
Some provisions were placed in — for these changes, and Allen will go through this in more detail in his financial review later. We look at our Manufacturing Technologies business in a little bit more detail then actually it’s a very similar message again to the half year, similar breakdown as to where we’re selling steel.
We saw the really strong markets for semicon, for electronics capital investment driving the demand for our encoder products. Flex gauging and machine tool products really with that need for automotive, more productive machining, still strong demand.
And also the strategy of serving the high-value solutions, very much targeted key accounts getting in Repeat business. That’s for Additive, and our REVO 5-axis system really starting to work well with Repeat business coming through. And I’ll talk about where that’s going later on in the presentation.
So we seriously hear long-term growth drivers, really positive and the stuff that we’ve talked about with new technologies coming through like Additive Manufacturing, Robotics, Semiconductor. These are all positive growth markets and key technologies to empower the future.
If we now take a look at the analytical instruments and medical devices sector then again, really, the message here is very similar to the one that we gave at the last update.
Our end-markets similar, one update to start with on spectroscopy though. The challenge we raised about some of the duty-free exemptions, certificates that’s now eased. So we did see a good second half for spectroscopy.
We did, however, as we were highlighting, we see some more challenges with the neuro business from the drug delivery side. So the trial that we had that was really improving the profitability of the group, that stopped. No issue with the device, there was a drug issue, which meant that trial stopped.
We do have a number of these opportunities in the pipeline. And we are really looking forward to getting some of these more trials coming through and the profitability, therefore, of that group improving.
Okay. I will now hand over to Allen
Allen Roberts
Thank you, Will, and good morning, everybody. As well as already stated, we have delivered a very strong performance this year, resulting in record revenue and record adjusted profit before tax.
Meeting this strong demand has been a real challenge given the global supply chain pressures we’ve seen. And I would like to thank all our people for their continued dedication to meeting our customers’ needs.
Revenue amounted to £671.1 million, compared to £565.6 million last year, an increase of 19% or 18% at constant exchange rates. Adjusted profit before tax is £163.7 million, 37% up from £119.7 million last year.
This is mainly as a result of additional gross margin from revenue growth. However, we have seen an impact on our costs from inflationary pressures, particularly labor and utilities, and there’s more on this later. This gives a return on revenue of 24% compared to 20% — 21% for the previous year.
Adjusted profit before tax is one of the key performance measures used by the Board to monitor the underlying trading performance of the group, and the following items are excluded from adjusted profit before tax.
Losses of £8.3 million from forward contracts, mostly US dollar-denominated, which are deemed ineffective for cash flow hedging compared with gains of £22.9 million in the previous year.
The movement has been caused mainly by the weakening of sterling against the dollar. These gains and losses have had no impact on our cash balances and no additional contracts are being designated as ineffective this year.
And £11.7 million past service costs relating to the UK defined benefit pension scheme and more on this shortly, and a credit of £1.9 million for the third-party advisory fees relating to a former sale process and the release of provisions for restructuring made in our financial year 2020.
The results and statutory profit before tax was £145.6 million compared to £139.4 million last year. The effective tax rate for the year is 17.3% compared to 20.1% in the previous year. This reduced rate mainly rises from the impact of the profit split by country and different tax rates in those countries, an increase in the patent box and CapEx super detection incentives in the UK, and an increase in the profits from associates and joint ventures, which are reported net of tax within the profit before tax.
Earnings per share on an adjusted basis is £1.855, an increase of 41% compared with last year and on a statutory basis, is £1.654, up from £1.532 last year. In line with our progressive dividend policy, the Board has proposed a final dividend of £0.566 per share, giving a total dividend for the year of £0.726 per share, a 10% increase over last year.
Returning to pensions. The company and trustees have successfully implemented a number of changes to the UK defined benefit pension scheme during the year. Following the Queen’s Counsel Opinion received last year, mainly relating to how revaluation and late retirement factors are applied, the liabilities of the scheme reduced by £14.3 million last year with a credit reported in the other comprehensive income and expense.
This year, the scheme rules have been changed to align with the historic administrative method for calculating the revaluations and early retirement factors. The result in increase in liabilities totaling £11.7 million has been recognized as a past service cost in the consolidated income statement. This cost has been excluded from the adjusted profit before tax.
We also agreed that the company will have the unconditional right to a refund of any surplus unwind up of the scheme aligned for the recognition of £40 million IAS 19 scheme surplus this year.
Following the agreement in the September 21 actuarial valuation the £10.6 million held in escrow as security has now been released from charge. In addition, the net book value of UK properties subject to charge has reduced from £81.7 million last year to £54.2 million this year.
This slide presents details of our income statement and the profit bridge shows the movements that reconcile the adjusted profit before tax of £119.7 million for last year, to the £163.7 million this year. We have seen a £66 million improvement in gross margin, excluding the engineering costs, which is attributable to the increase in revenue.
Our gross margin of 35% of revenue is in line with the previous year. However, we have seen an increase in the cost of a number of purchased items, particularly electronic components, aluminum and steel and an adverse currency impact. These have been offset by improved efficiencies resulting from higher production volumes and process improvements.
The Group headcount has increased to 5,097 end of June 2022 compared with 4,664 at the end of June 2021. The increase mostly comprises manufacturing staff to ensure we have sufficient capacity to meet demand and also an intake of 145 graduates and apprentices continuing our investment in future talent.
Labor costs, including bonus provisions were £254.4 million, an increase of 14% versus last year. This has been driven by an average headcount increase of 11% and plus salary review and performance-related bonus increases. We remain committed to our long-term strategy of developing new innovative and patented products to create strong market positions with net engineering cost of £78.6 million compared to £72.1 million last year.
Gross engineering expenditure increased by 12% to £85.8 million. This total expenditure was consistent with our plans, but we spent more than originally planned on existing product support with the need to redesign a number of existing products to maintain supply to our customers. As a result, or £59.4 million expenditure on new products was similar to last year.
We have also experienced an increase in other overhead costs, including higher utility costs due to rising energy prices and higher usage and other third-party administrative cost rises due to current inflationary pressures. Distribution costs have increased by £12.4 million this year, including £2.1 million of impairments following the cessation of our operations in Russia, an increase in travel and exhibitions as some restrictions related to the pandemic have been lifted. Adverse currency impacts, particularly from the weakening of sterling against the dollar and increased labor costs following payer reviews and performance-related bonuses.
Within administrative costs, we incurred £3.7 million last year nil of expenditure on services relating to the implementation of a group-wide ERP software package. In the previous year, administrative costs included £4.7 million of impairments relating to an associate company, which have not been repeated this year.
Profits from associates and joint ventures has increased by £2.7 million, primarily due to strong demand for the magnetic encoders designed and manufactured by RLS based in Slovenia.
Looking forward, as a result of benchmarking other pay reviews already completed and excluding the other factors such as headcount growth, we expect annual labor costs to increase by around £19 million in 2023 compared to — compared with this year. Where possible, we are mitigating cost inflation by increasing the sale price of our products and are focused on delivering productivity improvements across the business.
Moving on to capital expenditure. Of the £30.8 million expenditure in the year, £25.1 million related to plant and equipment, primarily to support our manufacturing processes and IT infrastructure, and £3.7 million on property, with the completion of our new distribution facility in South Korea, providing demonstration capability for our products, in particular, capital goods products.
Looking forward, we have commenced the expansion of our production facilities at the Miskin site in South Wales, to support future business growth. The committed spend is around £64 million, of which over £30 million is likely to be incurred in the financial year 2023. On the slide, you will see the latest progress on the development of the site.
We’re also planning significant investment in production equipment to increase both capacity and productivity, with a focus on automation and further investment in our IT systems and group-wide ERP systems.
Turning to cash flow. This bridge tracks the movements from our opening cash and bank deposits balance of £215 million at the 1 of July to the closing position of £253 million at 30 of June. Our operating profit before non-cash items and research and development costs gave a cash inflow of £254 million.
We have seen a net £48.8 million cash outflow from changes in working capital, primarily relating to an increase in inventory levels of £48.9 million. This reflects increases in global demand and planned uplifts to strategic safety stock levels to mitigate global supply shortages.
Significant cash outflows, relating to our capital allocation strategy, include £59.4 million of R&D costs, £31 million of CapEx, including intangibles and £49.5 million of dividends paid.
Other significant cash outflows include £23.4 million of tax payments and £8.9 million of pension scheme funding. Our strong cash position leaves us well placed to invest in the infrastructure needed to meet our future growth plans.
I’ll now hand back to Will.
Will Lee
Thanks, Allen. So, next, let’s take a look at the progress we’ve made on delivering our strategy. So look, across the board, whether it’s manufacturing technologies or analytical instruments, three key themes that we’ve always talked about, about product innovation, global support and manufacturing remain absolutely key for us.
What I’m going to go into a bit more detail, starting with manufacturing technologies, though, is how we’re using those to really grow by looking at the two routes to market, where we sell components to machine builders. And secondly, when we sell complete solutions to end users. And we’re also going to touch a little bit on how we’re both continuing to grow those existing markets by innovating with the next generation of products coming through and how we are also innovating to allow us to expand to go into close adjacent markets and accelerate our growth.
So first, let’s have a look at our focus on machine builders. So by machine builders, we’re actually having quite a wide range of different companies. We have here people making machine tools for cutting metal, and we also have companies making, for example, semiconductor manufacturing machines to go into the semiconductor manufacturing industry. Now here, we’ve got long, good relationships with these customers. So this allows when we bring new innovations through like the RMI-QE radio transmission system that we talked about a year ago, we can really allow our customers to push the game on secure those accounts with this next generation of technology.
It also means in areas where actually we’ve got markets to grow into, like with our laser tool setter. When we come up with a really innovative disruptive product, like the NC4+ Blue, we can start to take market share and grow our place in that market. Since launching that, actually, our sales team have done a really good job working with global accounts, and that’s really starting to grow our market share there. One particular a German company called Walter, make high-end grinding machines, and they have recently chosen and selected us as the laser tool setter for their machines going forward. So very positive news for us in terms of us outperforming the market.
Now more from the semiconductor side, a wide range of optical encoders are used across the board here for position feedback in these machines. And here, a combination of the innovation in the product and long-term account management really is allowing us to grow here. And again, very confident that we’re growing market share with new accounts coming through all of the time here. And this is really helping us on this wave of semiconductor investment really outperforming the market as well.
Now we also have the exciting programs here for the future, both on the new major products to come through in the shorter term and also on the disruptive technology for the longer term too.
We’ve also talked in the past about diversification within our manufacturing technology sector. So what we mean here is really introducing new non-substitutional products into very close adjacent market segments. A couple of examples here that we talked about that are really going well. First of all, FORTiS, the enclosed encoder designed this harsh environments, where we’re selling and promoting to machine-built predominantly. So what we’re seeing is the product innovation we talked about has been really well received, particularly actually the simplification and the ease of installation.
What we are seeing, and you can see names of some of our customers for FORTiS in the top right is that we are displacing incumbent suppliers and people like us for both the product innovation and our known and trusted support that we can give them globally. Really challenge actually here is ramping up the manufacturing capacity to cope with the demand that has been higher than we expected.
Also from our associate company, RLS, we have a new magnetic rotary encoder SpinCo, which is designed again to be sold into these machine tool builders.
So real advantage for this means with our existing sales force, we can really increase the revenue from each machine tool that is sold separately but aligned from a machine verification point of view, where we’re a world leader in machine calibration and verification.
We’ve also launched the XK10 alignment laser system, whereas, typically the calibration side is used at the end of the manufacturing process. This allows some of the fundamental setup to be done at the start of the machine building process. So again, a complementary product to areas we already are.
So positive feedback here on the products that we’ve talked to you about that we had launched. We also have a nice positive roadmap of products and technology here for ideas on new products along this idea of diversifying into those adjacent markets.
So staying with manufacturing technology, let’s have a look at what we’re doing with end users direct. Now clearly, we sell all our products also direct to end users, but there’s a couple of really interesting areas that we wanted to focus on. First, REVO 5-axis system going very well, combination of things here of the productivity advantages of the speed of REVO they can give and also the additional measurement capability that some of the newer sensors that we’ve launched really giving to our customers, really wide adoption across a large different range of customers, Ford, GM, Pratt & Whitney, GE all key customers for this technology.
EV, you can see on the right a picture of actually — because it’s a very flexible system. So traditionally, REVO is very good at measuring internal combustion engine parts, also very flexible and good for measuring EV parts as well. EV is quite interesting, because we always talk about the metrology challenges that there are with EV and how we solve those, but EV is pulling through business for us in many different areas. So interest in batteries recently with our encoders being designed into machines for battery manufacturer, and also Raman equipment is being used for analysis of parts within the battery. So a good, strong driver for us there going forward.
Now secondly, in terms of going back to the end user on manufacturing tech, additive manufacturing, here we’ve talked about this saying we had a strategic change a few years ago focusing on what we felt were really key accounts with potential for multiple system sales. And this, I think, from the success that we’ve had and are having with accounts was the right call to make. And we are now seeing that benefit of repeat business coming in from some of these. One that we talk about dentistry, Big-O, ordering more machines from a very large successful dental company.
So next, let’s have a look at our Analytical Instruments and Medical Devices segment, so first of all, with spectroscopy. The message we’ve been talking about is, like, how do we grow this into slightly newer markets and develop that opportunity for repeat business. The Virsa instruments we’ve launched to start with has really helped with that, and they must have try and move out just the research environment with a more flexible machines. So that is going well. We’ve also launched a new product, the inLux. So this is the product you can see in the picture on the right here. This is designed to be integrated with scanning electron microscopes. So it allows you, if you’re using a scanning electron microscope to get the benefit also of Raman analysis on the sample that you’re looking at.
This allows two new route to markets to open up for us, both selling direct to end customers who already have an SEM, and also through our collaboration with the SCM builders of it being sold as a solution as new.
And then secondly, from a neurological side, I touched on this earlier, the absolutely key bit for us here is getting the accounts in and getting the trials going with the drug companies that is key for the success of this business.
Clearly, implementing our strategy, it’s really important that we do this in a sustainable way. And we’ve touched on this before. We’ve got agreed targets in place now for Scope 1, 2 by 2028, and for all Scopes by 2050 at the latest. We’re continuing to invest by switching over to renewable sources where we can and also in self-generation solar panels installation changes in heating systems to make sure that we are accelerating towards that 2028 target.
When we’re looking at the Scope 3, one of the important things is understanding the benefit that our product gives, whether that’s reducing the way through novel AM adoption or in terms of the efficiency by making more accurate parts for engines then we really feel the stuff that we are doing, the products that we’re making and how we are helping our customers, really allows the world to develop for this net zero future.
So, if we take a look at our people, then I think you can see from everything that we’ve achieved this year, the effort that our staff has put in, has been absolutely fantastic. Also, I think it’s important to stress that when we’re looking at our business going forward, our primary growth strategy is one of organic growth. And this is because we feel we are operating in some really attractive markets, and we have the technology pipeline to really exploit these.
We also have a pretty good track record of making a success of this through disruptive innovation. This holds both those existing markets that we talked about and most close adjacent market opportunities that we want to also exploit. To do this, we’ve got to make sure we have the people to do this. And we’ve got to make sure we’re making the most out of those people.
We’ve been putting in initiatives across the group, both designed to really help people develop and succeed and also to minimize our churn. Now, this thing includes staff development, but it also concludes the financial benchmarking exercise that we went through that is going to cost us more money, the additional £19 million that Allen mentioned earlier.
We also plan to continue targeted recruitment. Our graduates and apprentices to our early careers are the lifeblood of the future of the organization and are our primary recruitment exercise throughout the year. We will also be doing targeted recruitment of key skills that we need that are vital for delivering on our plan.
Okay. So if we now take a look at the business environment and the outlook going forward and I guess to start with from a positive point of view. Look, we have a really high order book at the moment. Our order intake is still strong. It has eased a little bit from where it was the order intake that is from earlier on in the year.
We also report unless predicting more uncertainty in all the markets, particularly the semiconductor and the electronics CapEx. And we’ll have to see what happens there going forward in the medium-term.
What we do benefit for here though is some of the markets we’re exposed to. We’ve talked about ERAF stuff earlier, some of the defense stuff from geopolitical, feel like they are still strongly being invested into.
Now some of the challenges we faced last year, feel like they’re easing. Particularly from a supply chain point of view, they are still a challenge. But hopefully, they gradually get better throughout the year.
Certainly, as I mentioned, in terms of product lead-time, things have improved an awful lot for us in order to making sure we make the most of the opportunities that we have in the market.
Now, in this world of inflation that we’re moving into, clearly, for us, productivity is key in making the most of the resources that we have. We do — we are likely to see some increase in things like material prices, which as said so far, we’ve offset a lot of with our about productivity enhancements and some benefits that we see from where we’ve locked in costs on contracts such as energy going forward.
So, we talked about price rises back at the last update. They have been implemented by our sales regions. Better phasing here working through some of order books and previous orders. We’re expecting a couple of cent of additional revenue from these targeted price increases, and we will be reviewing this as we go through the year to see what additional measures we can take.
So, let’s summarize, overall, as always, long-term growth opportunities, great with the markets we’re in, with the innovation that we’ve got coming through. We feel very confident with our strategy and also the actions that we’re taking to deliver a really sustainable long-term growth for initial.
So, I’m going to hand over now to Chris, who is going to host our Q&A session.
Question-and-Answer Session
A – Chris Pockett
Okay. Well, thank you, Will and Allen. We’ve now been joined by Sir David. So, good morning to you, David. We have around half an hour or so remaining. And as usual, I try to group similar questions together, so we may not be able to answer all individual questions. [Operator Instructions]
So, we’re going to start with a question that’s come in. If revenue is up 6%, I believe that’s comparing H2 with H1, why were distribution costs up 19% seems out of line? I think that’s going to…
Allen Roberts
Thank you, Chris. Yes, this is where we’re looking at the revenue for the first half of the year compared to the second half, where revenue did increase from £325 million to £345 million, which was a 6% increase and distribution costs increased by 19%.
There’s a number of comported elements in that 19%, particularly the write-off of our Russian impairment and the closure of Russia that was about £2.6 million. We have seen more travel being undertaken this year post-pandemic. There was also an impairment of some property in Michigan for our fracturing business, which is relocating there’s an element of currency impact as well and some increase in headcount. In summary, they all add up to around about 19% increase.
Chris Pockett
Okay. Thanks Allen. And a question here relating to cash. So, net cash on the balance sheet is at a record high. Could we give – or could – yes, we give some of that cash – or could some of that cash be returned in a special dividend or a share buyback? And I think, Will, you’re going to take that one?
Will Lee
Okay. Yes. So look, it’s been really positive seeing how the business has generated significant cash recently. We have been discussing this as a Board. Clearly, we want to make sure that, we have the cash there to support our aggressive growth plans, and also to continue to see that, if there are harder economic times ahead. We’ve been looking at setting limits, and then we would be discussing over the next half, what things we can do with cash is in excess of the target that we need. So, Allen, if you want to talk any more about CapEx plans, you’ve gone through already some of those.
Allen Roberts
Okay. Yes. We’ve got some pretty extensive capital expenditure plans this year. As I mentioned in the commentary, we’ve committed to around about £30 million expenditure on Miskin for the current year. But that’s part of a big – much bigger total of between £60 million and £70 million for construction. We’re almost doubled in the size of our Miskin plant. This is the biggest ever CapEx program we’ve undertaken.
So – but we’re looking to complete holes three and four by the end of December next year. In addition to that, we’ve got some pretty – we’re building a new office walk down in Brazil, and we’re doing some refurbishment in the Netherlands. Additionally, we’ve got some very extensive plant machinery expenditure, not just for volume, but also for further automation of processes. Although, not quite capital, but we’re putting a significant investment into our ERP programs, with the first deployment of our D 365 taking place this year. And this is likely to be slightly less than the £3.7 million that we spent last year.
Chris Pockett
Okay. Thanks, Allen. There’s another question here relating to cash. Given increases in bank base rates with more to come is the company expecting to generate significant increases in interest income in the coming year? And I’m going to give that one back to Allen.
Allen Roberts
Very simple answer to this one, and the answer is yes. We are expecting to see an extra 2 million to 3 million, 4 million additional interest income this current year.
Chris Pockett
Okay. Thanks very much, Allen. A question here on ownership, in the Chairman section of the release, David states that he and John Deer remain committed to Renishaw. Does that mean you have now completely finished exploring all options? And I think Will, you’ll take that one.
Will Lee
So – it certainly doesn’t. This is something that we are having discussing frequently as a board as to what options there are and how we can work together to find the best solution here for all stakeholders as we have been doing. So those discussions continue. And I see there’s a few other questions on here, there’s not really much more we can add on that position today.
Chris Pockett
Okay. Thanks, Will. Question here, we’ve got a market share and I think it’s going to go to you as well. Will, can you remind us, please, what your market share is in each product area?
Will Lee
Yes, we don’t talk about exact market shares. We did go through an Investor Day and show that in our established businesses, our traditional businesses, we are very much number one or number two in everything that we do. And for newer areas, we have to have a plan as to how we’re going to get there, such as additive manufacturing for the future and actually, a couple of businesses where we didn’t think we had the opportunity to do that, then a few years ago we invested, so that’s where we are at the moment.
Chris Pockett
Okay. Thanks, Will. A question on additive manufacturing here. Can you talk about what rate of growth you’re seeing within the additive manufacturing business? Has there been a notable step-up versus fiscal FY ’21, guessing Will, you’re going to attain that?
Will Lee
Yes. The change here has been more actually the migration of the strategy that we talked about of the focus on key accounts with the opportunity to repeat business. And that’s been a really pleasing thing to see, our last financial year and that’s what we expect to see accelerating through this year, just been out visiting our US team at the large IMTS trade show over in Chicago and you can see, we’re now starting to really get the repeat business coming through from a number of customers over there as we are in — also in our Europe region. So, I think a real positive outlook there for this financial year.
Chris Pockett
Okay. Thanks. Sounds very good. Okay. Some questions now on China, are your facilities there back at four levels of operation? And if global OEMs shift incremental production investment to other markets such as, India and Vietnam, how well are you set up to support that?
Will Lee
Okay. Yes. So last time we spoke, we had all those challenges over in China. Really pleased to say we are back up at full levels over in China now. That’s occasionally smaller lot done regionally, but we’re well placed to support and get product and support customers. So yes, and also a good point here with production, which we are seeing moves of certain people to countries such as India and Vietnam. India, we have long been established in and have really good coverage. Vietnam over the last 10 years, we’ve been steadily growing our capabilities there as it started to show signs of becoming more and more with the manufacturing there. And yes, so we are well placed in Vietnam to make sure we can support our customers.
Chris Pockett
Okay. Thanks, Will. Next question now on semicon. Can you be more specific about the level of weakness in order intake from semicon electronics sector so far in FY 2023? And has it been across all product groups who supply these end markets and pass that one to Will.
Will Lee
Yes. So when we talk about this weakness, predominantly we’re talking about where we supply our different range of encoders into semicon electronics CapEx. So it’s very much focused on the encoder market here. There – as I said, there has been a weakness, not huge, but it is certainly the order intake has been reducing.
We think bits of probably overstocking that is going on but a bit more uncertainty also with those capital equipment manufacturers. [indiscernible] of recovery these could be long-term demand drivers are very much still there. And the information we seem to get at the moment suggests that this is just a phasing issue and things will pick up actually in the shorter term, but we will see.
Chris Pockett
Okay. Thanks, Will. And actually, this question is relating to Semicon as well. Do you still have a significant backlog of Semicon and electronics orders to support revenues in this area over the coming months or will weaker input have a fairly immediate impact on sales trends here. I’ll give that one to you.
Will Lee
Yes. So we — as a group, we still got a really strong order book 2.5, three months or so at the moment. So we — yes, we have that and there’s a significant amount there, which is to do with Semi and electronics. So yes, we’ve got some good coverage. And still, as I spoke about before, we are getting better visibility from these customers than we used to and more dialogue, as I think they’ve realized how important it is to have — give the supply chain more clarity to make sure we have the ability to make sure we can supply to them.
Chris Pockett
Okay. Thanks. Slightly different question here. Why do you think the share price is so low given the stellar performance? Will, do you want to take that one?
Will Lee
Yes, it at that. So look, we’re really pleased with the performance of the group. Where the share price is harder for us to speculate, I guess, you can look at the companies with long-term growth plans seem to have been more hit I believe that the analysts to judge. All I can really comment on here is we’re very positive on the performance this year and we’re extremely excited with the opportunities that we’ve got going forward. Particularly, I think the innovation, the new products coming through and the ability to outperform the market growth rates, which are nice as well. So how knows.
Chris Pockett
Okay. Thank you. Question here, relating to our two core sectors. Can you remind us of any synergies between the core manufacturing technology division and the spectroscopy business, in particular? I think, Will will take that one.
Will Lee
So, the spectroscopy is quite a different business from the manufacturing technology area of our business. Because of that, we have been increasingly separating it and running it as a stand-alone business. So it still benefits from some of the group functions and the support from our overseas sales operations. But in general, we run it more separately.
It does, some of the trends and some of the information coming through, I’ve talked earlier in the presentation about actually battery, so we will be selling into the same companies and gaining market information and needs and sharing them, but in general, it’s one very much as a separate part of the business, as is neuro, which is now going to fit up into a separate company even.
Chris Pockett
Okay. Thanks, Will. A question now on currency. This one is going to go to Allen. With significant movement on the US dollar, even since your year-end, what impact is this having on Renishaw, including forward contract coverage?
Allen Roberts
Thank you, Chris. Yes, we’ve got a hedging strategy in place whereby we cover approximately 75% of our forecast cash inflows. And what we’ve experienced last year that the average cash — the average rate, in particular for our dollar, we cover US dollar, euros and yen, our principal currencies, where we have hedging strategies in place. Though the significant one being US dollar.
And last year, we saw an average forward rate of around about £1.42 and for the current year we’re looking at an average rate of around about £1.32. So we should see some sort of benefit from that. We have a currency hedging strategy going forward for two years.
And so — and we have set caps at which we will undertake contracts. So, I think, potentially year-on-year, we should see a benefit. But we’re based on current exchange rates. We don’t know where they’re going to be going over the next six, nine months.
Chris Pockett
Okay, Allen. Thank you. Question here on strategy. You have stated you are focused on organic development. Do you think that risks missing inorganic opportunities that could accelerate your time to market versus internal development?
There are laser technology peers for component inspection on much cheaper valuations at this point in the cycle, cash is also at an all-time high, is this good capital
allocation. Will, do you want to start with that one?
Will Lee
Okay. So good question. So we’re looking at this we’re always evaluating to see are there some small companies developing some new technology that we think we could really benefit and utilize our route to market on that is complementary. So we are reviewing this. As you can see, the nothing at the moment that we have done say for growth is the excellent R&D that we’ve got going on across the group, and that will be fueling the majority of our growth. Areas that we think maybe we are weak from internal review, we will see if there’s someone that we think brings something really quite disruptive from that side, but that will probably be the only reason that we will look at acquisition.
Chris Pockett
Okay. Thanks, Will. There’s a question on labor costs. I think this is one going to Allen. You speak about £19 million of additional labor costs expected in FY 2023 year-on-year. Can I ask the extent to which these increased costs were already being incurred in Q4 of the year just completed.
Allen Roberts
Thanks, Chris. Yes, actually, this is an incremental cost versus last year and as a result of our July 2022 on your pay review. And so that is an absolute amount based upon that review. And additionally to that, we are recruiting — continuing to recruit. But we’re not sure at this time what the cost of that incremental headcount increase will be.
Chris Pockett
Okay. Thanks, Allen. One, I think Will – for Will. So the Capital Markets Day, Investor Day, you talked about visibility on the order book having increased and never been higher. Has this reduced again?.
Will Lee
Order book. Sorry, sorry, Chris
Allen Roberts
My apologies
Will Lee
So yes, the order book has reduced. It’s still really healthy, as I mentioned, I think earlier on in the Q&A about 2.5, three months. So we still got one order book. We are — got the advantage of our run rate of getting — so our manufacturing at getting products side is increased. So that’s really good. And we have seen a like sort of easing off in the semicon, so the — our encoder product line, order intake, which is predominantly sort of an APAC region issue for us at the moment.
Chris Pockett
Okay. Thanks, Will. I’ll just randomly direct questions that you just keep you on the toes. Okay. Some more questions on China. I think some of these have already been answered. But are you seeing any changes in the competitive dynamics, is there anywhere you are gaining or losing market share most. Sterling has depreciated a lot, for example 15% versus the US dollar year-to-date and most of your costs are in sterling. Can you confirm that you have shorter FX hedges now? Do you have any estimates of the benefits you’ll get from this. So first question, I guess, on China to you, Will, and then we have currency question, which we’ll put to Allen. So we’ll start with Will.
Will Lee
Okay. I think –China talked about is fully up and running and demand is strong, the concern that there being order intake on semicon, where there’s manufacturing done there. In terms of competitive dynamics, gaming and losing market share. So I said that this is really important for us, and we do monitor as well as we can.
Most promising, I think, is some of the newer products that we have launched those where we have going to areas where we’re not already there, like FORTiS closing encoders, clearly, a lot of market share to take. And that actually, I think, of all the products that we’ve launched that I can remember which are designed into other people’s equipment to be sold on that is having the fastest uptake rate and the biggest impact that I can ever remember. So that is, by far, the most positive at the moment.
We’re also there with other or open encoders, really doing well in terms of gaining accounts often long-term relationship building. As I said, what we can see now is as this market has done well, really, the full impact of those coming through over the last couple of years.
In terms of losing market share, nothing significant. We have had areas where, when demand was very strong, then there’s probably a couple of accounts, which ended up getting shared where we would love to have had more of the business, but we were up against it in terms of supply but long term, positive and very much a sales organization focused on making most of those opportunities. I think second half here is over to Allen.
Allen Roberts
Thanks. I think I cover this in a previous answer to a question, just to confirm that our foreign exchange hedges are now down to two years, we used to have about a 3.5-year coverage for the last couple of years, we’ve been we have shortened it down to two years forward currency contracts.
Chris Pockett
Thanks, Allen. Okay. There’s a lot of questions here to go through. Sorry, I’m just looking through seeing if there’s any that we’ve already covered. There’s slightly different question. Can you split out the revenue growth between price volume and well, I think over there.
Will Lee
Yes, but by far, the most of this is due to volume, which is both good market conditions and also gaining in market share. The price increases that we talked about are really only come into effect now, so the extra couple of percent that will be for this financial year relative to last year, there wasn’t anything at all significant last year.
Chris Pockett
Okay. Thank you. Another question here, which I think is going to be for Will in terms of end market exposure. What are the markets that are slowing down, for example, Semicon, which I think we’ve already discussed and those that could be accelerating auto aerospace, what does that mean for the order intake over the next 12 months. That’s going to be one for Will.
Will Lee
Okay. Thanks, yeah. So quite topical there something just got back from a trade show. So auto, EV investments still very strong, lots of new metrology challenges there, which everyone is trying to understand the best technologies for solving those. And we think REVO integrator really well placed for those and we’ve had some good demonstrations and some good customer visits on how we’ve been solving those challenges. Actually, also, as I mentioned again, we often overlook the battery side of things and that’s driving demand for and Raman encoders and also industrial metrology there as well.
Aerospace, feedback from this week actually at the show was that the demand for projection in terms of airplane orders is going to need significant investment to be able to keep up with that demand, and that’s going to be a real challenge. So we think actually, the aerospace market is going to do particularly well. And also, I mean, sadly but talk on the political environment that there are lot of expenditure into defense. So — and for stuff for immediate orders, and that’s going to benefit both machine tool side inspection with CMM and also additive manufacturing. So yes, a few of the highlights as opposed to the — some of the debt stuff that we talked about with a bit more uncertainty.
Chris Pockett
Okay. Thanks, Will. It’s a question here relating to additive manufacturing. You mentioned dentistry specifically, but how wide in scope to other sectors is your AM division? It’s going to be another one for Will.
Will Lee
Yeah. So AM’s go through a really interesting change at the moment where we find customers are starting to embrace and understand the philosophy of the benefits that AM can give them if they embrace new design philosophy and how to design parts, not for a traditional machine tool, but design optimized for an AM machine. And this can really give them productivity advantages, cost advantages and performance advantages. What’s really nice from that output is actually that means that across all sectors, really AM has started to become very relevant. So yes, dentistry within healthcare is a traditional area where the advances are understood, but now it’s becoming far more broader than this and actually applications that really cut across all areas.
Chris Pockett
Okay. Thank you. Question here on electric vehicle market in terms of metrology. Could you explain in simple terms why metrology in EVs is more complex than petrol diesel engines is the potential revenue growth from EV’s a net benefit, or will this simply replace revenues from petrol diesel engines? This one for Will.
Will Lee
To make it clear, I don’t think the metrology demands are more complex in an EV, but than a petrol diesel, they’re just different. And in the petro diesel world, there’s been many, many years of trying to optimize, understand and work out the best way of coping with the metrology challenges. What we have is with EVs is far newer. So the metrology chances coming through are different, requiring different ways of using our technologies.
Now advantage for us is the same technologies that we’ve developed for the petrol diesel engines, because they’re flexible and programmable they can be redeployed to measuring EV. But if you imagine on the electric motor, and you’ve got the cables, otherwise in it, so, and you’re trying to measure different heights of some of those. They’re just different things than manufacturers are used to with traditional internal combustion engines.
So in terms of revenue, I think clearly, I mean, there is still research going on – on the traditional drivetrain that’s being complemented them with the new investment going in on EVs, both in cars and batteries. Exactly, how it pans out in terms of overall investment in terms of – probably ends up being a reduction number of machined parts. But new investment going on into different styles of the drivetrain.
Chris Pockett
Okay. Thanks, Will. Here’s one I think is certainly Allen could talk to. What are the revenue and cost implications of close in your Russian operations?
Allen Roberts
Thank you, Chris. Yes, we – the revenue invitations were – Russia contributed approximately 1% of our revenue. And in terms of costs and the write-off, it’s primarily the leasehold premises that we occupied some demo and stock write-offs, and also some – obviously, the – looking after the staff that we employed in Russia, and the couple of closures of our perm and Moscow offices. Additionally, there were some residual cash in the balance sheet, and we’ve impaired all of those costs.
Chris Pockett
Okay. Thanks, Allen. I’m very conscious of time, we are starting to lose people. So I think we’re just going to take a couple more questions. Unfortunately, not going to be to answer everything on here, we’ve had exceptionally high number of questions today. But I’m conscious of time. The question here, which is different to anything that’s been asked to-date, how many of your main products are now compatible with third-party software? I am going to put that one across to…
Will Lee
Okay. So two areas here really to comment on, firstly, is our REVO, 5-axis, Hyprop, CMM sensors. So here, we now have, for example, with a company, a metrology company that we’re seeing just this week some really good stuff that we’re doing in collaboration, solving some challenges for a customer where their experience with that software, but wanted the advantages of REVO immediately.
So you can now have that with that software or our own software, which most people are using. Also from the Equator, we now have actually a broader range of the creator because it’s a simpler product for shop floor gauging.
And again, what we’re starting to see is customers who are maybe one particular sort of software and now starting to evaluate and look at the Equator platform as a stand-alone, non-turnkey solution for us to buying the Equator for our mass and program it themselves.
So yeah, really good progress there in terms of the development work and hopefully, we’ll see a good increase from sales this year from that.
Chris Pockett
Okay. So this will have to be the last question I suppose, the compass the loan we’ve overrun, and we’re losing quite a lot of people online now. So is there any geographical variance in the weakening order intake and more cautious sentiment you are experiencing, and that’s going to be one for…
Will Lee
Yes, this is more in Asia Pacific here, which is partly because far more of our — the semiconductor CapEx business is over there and the kind of business goes more of it goes there. But we’re also — I mean, having just come back from the U.S., it builds a more positive economy and market conditions over there and a more optimistic outlook going forward, so yes, a bit of geographic variance there.
Chris Pockett
Okay. Well, thanks very much. I think we’ll need to end it there. So that ends the Webcast. As ever, we will aim to publish a recording of today’s presentation and the Q&A session on the IR section of our website by tomorrow morning.
On behalf of Renishaw, I’d like to thank you all for attending this event. And hopefully, it’s been valuable to all of you. Finally, just a reminder that you can download the report — the full year results report and a copy of the financial presentation that you have seen from our Investor Relations web pages. And those will be available later today. Again, thank you for attending. And have a good day.
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