Earnings Transcript for RSW.L - Q2 Fiscal Year 2020

Chris Pockett: Good morning, everyone. My name is Chris Pockett. I'm Head of Communications for the Renishaw Group and I would like to welcome you to this live webcast presentation of Renishaw's Preliminary Financial Results for the Year Ended June 2020. Present in the room today are today’s main presenters, Will Lee, Chief Executive and Allen Roberts, Group Finance Director and Sir David McMurtry, Renishaw's Executive Chairman, who will join the later question-and-answer session. 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, there will be a Q&A session in which we will try to answer as many questions as possible, before we close at 12 o’clock. 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 would also like to point out that all financial information given during the presentation will be in pound sterling. Thank you again for joining, and I will now hand over to Will.

Will Lee: Thank you very much Chris. Certainly, this has been a challenging year for us as Group, with the economic conditions that we have faced. Our revenue was lower at £510 million pounds for the year. And really, this was challenging economic conditions throughout the year and then the impact of COVID-19 coming through in the second half for us. Our metrology revenue was 11% lower. One highlight there, we're seeing growth in our precision encoder product line. So this includes our optical encoders, laser encoders and our magnetic encoders. And this was predominantly due to recovery in the semiconductor market for us. Healthcare revenue, lower at 14.6% and we really did see here, with some of the CapEx stuff and also postponement with elective surgery, a reduction there with the pandemic. Now, to talk about core relatively high margin, high fixed cost business. So with lower revenue, clearly our profit was adjusted more and adjusted profit before tax was down at €48.6 million. The statutory profit due to some restructuring charges and actually some impairments due to fair value, some ineffective hedges, was down at €3.2 million. Allen Roberts will talk through that in more detail later. So we did have to take some difficult decisions through the year. And we're very grateful for the support of our staff throughout the year, whilst we were doing this. The things we did, was looking at a real business resizing across the whole global group. Restructure in particular of our additive manufacturing business, which I will go through in more detail later and Allen will talk to financials on. Really looking in it at pushing on our operating costs and making sure we were being as productive as we could be, and also conserving cash by canceling the interim dividend and deciding not to pay a final dividend. We did spend money on capital expenditure, majority of which were stuff in the first half of the year and Allen will go through more details on this. And we did end the year with a strong balance sheet of cash of £120 million. We are continuing to invest for the future, but with a real focus on making sure most -- making the most of the investments that we have already made and with a real focus on prioritization, so making sure we’re make the most of the really excellent assets that we already have within the business, and I'll talk through a bit more on this too. So I will hand over now to Allen Roberts, who will talk us through the financials in more detail.

Allen Roberts: Thank you, Will, and good morning everybody. By way of introductions as well as already commented on, it has been a very challenging year for the group due to the adverse global economic conditions prevailing throughout, heightened in the second half of the year by the COVID-19 pandemic. We want to undertake and restructuring and resizing activities, which have reduced operating costs in many areas, and there's been an increased focus on cash preservation, more on this shortly. Revenue in the year amounted to £510 million lower than the last year by 11%, and 13%. lower at constant exchange rates. Adjusted profit before tax is £48.6 million compared to £103.9 million in the prior year giving the return on revenue of 10%, compared to 18% in 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. The following items are excluded from the adjusted profit before tax. Restructuring costs, we've taken a number of difficult decisions this year, relating to the reorganization and resizing of certain activities, particularly in our additive manufacturing business, and a wider redundancy program under take in the second half of the year. Restructuring costs in the year £23.8 million of which £17.5 million was attributable to our AM business and £6.3 million to our wider redundancy program. During the year, we reduce our highly probable and more than likely and not the revenue forecast for Renishaw plc and Renishaw UK Sales Limited, which are the basis for determining the effectiveness of our cash flow hedging forward contracts. The reductions arose due to the increased uncertainty over future trading levels as a result of the global economic conditions, and of course portions of the forward contracts to becoming effective with fair value losses on financial instruments, not eligible for hedge accounting £21.6 million in 2019 at £6 million gain, in accordance with our first nine. These losses have had no impact on our cash balances. The results of statutory profit before tax of £3.2 million compared to £109.9 million. The effective tax rate for the half -- for the year is 91.6% compared to 16.1% in the previous year. The main factors driving the increase in tax rates this year are, there was no patent box benefit this year. Last year, there was £1.8 million credit, due to losses in the U.K, largely driven by restructuring costs and losses on ineffective hedges, an increase in the different tax rates in the U.K. from 17% to 19% resulting in a charge to £1.1 million and the partial derecognition of deferred tax assets for U.S. tax losses and excess interest due on increase uncertainty over future trading levels giving rise to £3 million tax charge. Earnings per share on an adjusted basis £0.51 and £0.04 on a statutory bases. Following the onset of the pandemic, the interim dividend, which had already been waived by all directors was cancelled in order to preserve cash. As previously announced, there will be no final dividend declared in respect of the year. The profit bridge shows the movements to reconcile the adjusted profit before tax of £103.9 million the last year to the £48.6 million this year. The significant movements are £48 million fall in gross margin, largely result of low revenue. The cost of sales percentage increased by 1% to 36%, which would have been much higher without operating cost reductions. A reduction in net engineering cost before capitalized development cost impairments of £12.4 million arising primarily from reduced headcount and shorter working hours or furlough for most R&D staff in the final quarter of the year. Impairments of capitalized development cost totaled £9.9 million compared to nil in the previous year, relating primarily to metrology products of a capital nature and where the high volume growth previously anticipate is now less predictable. Reduced distribution costs -- due to lower staff and other operating costs such as exhibitions and travel costs. The adverse net year-on-year movement of £10.3 million across financial income and financial expenses, relates mainly to currency volatility on intergroup balances. Last year financial income included currency gains of £5.9 million compared to currency losses of £2.4 million this year reported in financial expenses. As previously mentioned, we have reduced operating costs in a number of areas, with total payroll costs in the year of £221.3 million, compared to £237.4 million in 2019. This year's costs includes £4.5 million of income from government grants to support job retention during the pandemic. Group headcount reduced by 578 people, 11.5% during the year with a closing headcount of 4,463 at 30th of June 2020. The average end count in the year was 4,797, 3% below the prior year average, Adjusted profit before tax in the second half of the year was £34.3 million compared to £14.3 million in the first half. The improved performance in the second half resulted largely from reduced operating costs from actions initiated in the first half of the year, reduced working hours, and government grants with job retention, favorable currency and foreign exchange rates versus first half, and partially offset by the impairment of capitalized development costs. Moving on to the balance sheet, I'll cover property, plant and equipment and cash separately. Intangible assets totaled £60 million at the year-end, £12 million lower than June 2019. Before relates to £16 million capitalized development cost impairments referred to earlier with £6 million of this included in restructuring costs. Right of use assets of £13 million and lease liabilities of £13 million, both current and non-current, are new lines on our balance sheet this year and rise from the adoption of IFRS 16 leases effective for the group from the 1st of July, 2019. The assets comprised mainly leased properties and vehicles around the group. Deferred tax assets have increased from £30 million to £40 million, reflecting the U.K. deferred tax rate increase from 17% to 19%. The increase in U.K. pension scheme deficit and the increase in net derivative liabilities during the year. Inventory balances have reduced by nearly £24 million since June 2019, reflecting our management inventory during the period and reduced demand, and reflecting £4.9 million of additional inventory provisions included in restructuring costs. Debtors have decreased by £50 million since June 2019, with trade receivables reducing by £11.9 million, primarily due to the reduced trading levels. Creditors have also reduced due to lower trading activity and lower bonus accruals compared to June 2019. Net derivative balances which represent the fair value of foreign currency forward contracts and the options yet to mature now total £59 million net liability compared to £51 million net liability at June 2019. This increase arises mainly from the weakening of sterling against the hedge currencies during the year. Pension scheme deficits now total £65 million compared to £52 million at June 2019 with a decrease in the discount rate from 2.3% to 1.5% for the U.K. scheme being the main factor. Decreases in inflation rates and funding of £11.8 million have mitigated the impact of the discount rate change. Net assets equal to total equity have reduced by £36 million to £548 million, mainly as a result of the final dividend for 2019 of £33.5 million paid in October. Turning to cash flow. The Board has increases focus on cash preservation during the year due to the prevailing challenging global economic conditions followed by the pandemic. As previously discussed, a number of actions were taken to reduced operating costs and we've also reduced capital expenditure during the second half of the year and cancel the interim dividend. This cash flow bridge tracks the movements from our opening cash and bank deposits balances of £107 million to the closing position of £120 million. Our profit after tax before non-cash items and new product development and engineering costs gave a cash inflow of £144 million. We've seen a further net £33 million cash inflow from changes in working capital with decreases in debtor and inventory balances more than offsetting reduction in payables. Cash flows related to investment -- investing activities, including new product development and engineering costs of £67 million and capital expenditures of £39 million more on this shortly. The final dividend for 2019 of £34 million also paid during the year. Despite the ongoing challenging global economic conditions, our strong cash and bank deposits balances at the end of the year together with our future trading prospects underpin our going concern and three-year viability period assessments. To finish our results review, a few words on capital expenditure during the year. Total capital expenditures were £38.7 million of which £24.6 million related to property. £28.4 million of the additions were incurred in the first half of the year, with the spend in the second half significantly lower at £10.3 million. Major additions were

Will Lee: Thank you, Allen. So now we're going take a little -- a cost business on what's been going on. I got to start with having look at the business environment and we'll have some of the industry sectors and some of the changes that are going on. So we talk about this in the past of where our products end up in the market. I guess a few of the interesting things going on automotive, we've talked about recently saying it has been more challenging there and we do see signs of EVN investment, but in general that remains quite weak. Aerospace was one -- the last time we spoke, we're still quite buoyant that clearly impacted by the pandemic. We do still see a need for a research investment there and some people think actually that could be an increase in investment of looking to the next generation of technologies in aerospace, which could be beneficial for us. What we have seen now, we talked earlier, it's very much covering the summit at the market, many drivers for this, which I will talk through in a bit more detail later on. Now actually have we fell into these markets is often very much still through machine builders, that might be, manufacturers of semiconductor equipment, electronic equipment, CMM manufacturers or machine tool builders. In particular one that's really important for us is machines who build a market and all the industry sets of analysis there that shows that, that market has been weak and has been getting weaker whether that's the JMPTA numbers or American equivalent. We've also then got the macroeconomic stuff going on. I'll talk a little bit about some of these up next, starting with Brexit So I spoken about Brexit and what we've been doing here and the fact that traditionally we have shipped product directly from the U.K. from our sites across Europe to the customers. What we've talked about and setting up a new warehouse in Ireland that will take that on and start doing shipments directly from Ireland. That's now running, as you can see in the picture and we are now shipping already to France Italy and we will migrate the remaining European customers that we used to ship to directly from Renishaw to this warehouse in Ireland before the end of this time of the year. So things are going as well as can be expected. There’s still uncertainty on what the outcome of Brexit negotiations will be. Marketing for all companies and everyone going on this year has been COVID-19. We are very clear with everyone that this is our priority -- the number one priority was making sure of the health and welfare of our employees, families and communities. But we were all very clear that we have some very important customers, that we have to make sure that we could continue to keep these global supply chains open. And our manufacturing group did a fantastic job on all our sites, which were open for the vast majority of all of the time and making sure that we kept our customer supply with the critical equipment to them. This has been actually very good for us with a very positive feedback and it's also actually probably helped us in terms of anything, gaining a business on accounts going forward. Whilst doing that we also helped out as part of the VentilatorChallengeUK, we made a whole bunch of machine parts with our factories running 24/7 right in the height of the crisis. The other really important part for us during the pandemic is making sure we kept the customers supported. So that was with both from a technical point of view or on the technical challenge and how to use our products. And I think here very much our setup with having lots of people locally, regionally, you can see here in China, rather than centrally organized, we have a distributed support network, which means that people can travel and still get to see customers most of the time. We are now more getting out and starting to do actually installations and onsite work, but only where we have the health assessments that have been the risk assessments have been done. So then, if we look across the different product lines that we have that we've talked about before. Then really as we've talked about in the past, we have drivers of precision making things more accurate productivity in throughput and practicalities of how easy it is for people to utilize our technology. And really with the impact of COVID that's pushed forward and some of the demands coming through here and we'll talk about that and how it impacts some of the different product lines on the next few slides. So we start with industrial metrology. And now we've talked about this is really us making sure that metrology is embedded into the manufacturing process. So form a productivity point of view is making sure that rather inspecting a product later on, building metrology and making sure you make the product right first time. And what we see here really is the same trends continuing COVID is really accentuated that need for automation and removing the number of people that are in these manufacturing sites, something we have sell our from our own manufacturing facilities with our machine shop, and something that's gaining traction more and more everywhere, across manufacturing companies. So if we look at a couple of new products that we have launched, and how those drivers really are pulling through here. On the left, we can see our NC4+ Blue, so this is an on machine tool setting. So rather than a manual device for looking at tools and setting the tools off the machine, this is allowing the manufacturer to do this stuff automatically on the machine. Now what we're doing here is pushing this technology on a number of enhancements to the NC4 outlined with a blue, instruction with a blue laser. What this does is actually by switching from a red laser to a blue laser allows us to really be improve our performance in measuring very small tools which are becoming much more common for doing delicate features. What we're also seeing then in terms of productivity is this push for automation, which I mentioned and here what we really say is actually trying to do more things at the same station. So the REVO talked about many times in terms of its high productivity with additional touch measurements. And what we've now added to is an additional sensor to it. So this one here means that you can do your high-speed touch measurements then automatically change. And on the same part with our fringe probe then do area surface measurements, so you compliment high precision touch measurements with the optical fringe measurements to fill in surfaces as well. So both the new products have been very well received by end users, and also the OEMs that will supply them often to customers. Big driver for us, is also practicality. And this is making sure that of the wonderful technologies that we have for driving productivity and precision in manufacturing that we are making them as accessible to manufacturers as possible. And a real success story for us here has been our Set and Inspect software, which you can see on the right running on a machine tool. What this takes is a very traditional way of programming tech space and makes it very easy in terms of push button with a graphic user interface. This really, call it, market feedback is showing actually the number one reason often our proven technology does not get use on machine is actually the skills or the complexity of implementing the solution. This makes it very, very easy to do, and we've seen pull-through there of this. What it does mean and one of our key metrics is our probe fitment rate. How many machine tools when they go out are fitted with probe standard and this is all designed to make customers on their next machine tool that they buy say, yes, the probe is an option that I want. What it also provide is you can see in the screenshot, the bottom right is then reporting, so you can start to get real-time data coming off, very easy to see, and also very easy to send into your central system. So you can keep track of process that is going on, and this has focused on our machines or product line, but this objective of making stuff easier to implement is a real key objective for us across our industry metrology product range going forward, so expect to see more innovation from us here in the future. Position measurement, and the touchdown was the area of business that we saw growth in this year. This was really driven by a number of demands coming through from investment in semiconductor flat panels and electronics, number of drivers here and actually many indications of the pandemic with more people at home with more disposable income spent on technology seems to be generating more investment in this market. What’s really key for us as I mentioned in manufacturing was actually our vertically integrated in-house manufacturing and our ability to supply it very short lead times, products to our customers. Again, practicality, very much important for this, we focus often on the microns and the nanometers of performance of our products here. But actually, in terms of new stuff, here we have the ATOM DX, what it does is it takes our smallest readhead, and putting inside that and insert it. So rather than having to take the analog quadrature and do more complicated processing with it, you can now directly from this readhead take a very simple, dishwasher, which can be plugged straight into most controllers. We've also implemented functional safety in a number of our readheads. and this means that they can be used in environments where there's a collaboration between, for example, a robot and a human, where actually the safety requirements are sensibly very high. So we've discussed already, that we've made some changes to our additive manufacturing strategy this year. What we've really looked at is simplifying and focusing our business bang on to the areas where we feel we have key strengths. And this really means looking at working very collaboratively, literally, with those customers that are up the curve, they understand AM technology, and they're really now at the point of preparing for AM volume production. This is really good for us. It builds on the strengths of our RenAM 500Q machine, which is a highly productive with its four lasers, and therefore is ideally geared up for fully manufacturing and reducing the cost per part or making additive manufacturing cost effective for many different parts. Now with this, we've made some really good progress with a number of accounts. Some of those are some really key aerospace accounts for us. Interesting to see how this technology is gradually gaining adoption, Recently, BAE Systems and that's actually for the new Tempest, target 30% of the parts to be manufactured. What we're focusing now on with the new strategy from a design point of view, is really on some of the interesting innovations that we have -- regarding pushing the productivity further and pushing the precision further of the machine platform that we have. So with Raman spectroscopy, we actually launched a new machine this year, which is the Virsa and again this is actually abate the practicality of the machine. So we have a fantastic machine with the inVia, this is a very much designed for the laboratory. And you can see here example of the sample on the right of a fresco which would be too large to put in a traditional Raman machine. So we have is a fiber-coupled machine with a Virsa and this aligns much more flexibility in what is being measured. So that was going very well in new product for us. We've also done inVia ™ InSpect system, which is very much geared up for a forensic crime investigation. And what it does have a new better imaging, white light imaging which you can find -- the white light imaging and the Raman together which is about really key for forensic investigation. So with our neurological product line, it really was impacted by the pandemic. We did see a reduction in the number of elective surgeries taking place and that reduce the demand for our consumables. Underlying demand is absolutely still there from neurosurgery coupled with more important area where you want precision and productivity in terms of patient outcome and in terms of cost of theatre. We have a number of installations of the robots during the year, predominately focused around the treatment of epilepsy. We also created a new company Renishaw Neuro Solutions, and this is really to reflect the difference of the neuro business and its different vision and objectives to the rest of Renishaw. What we've done with this business is developed some excellent technology particularly around our drug delivery new products, what we're really looking forward now is some external investment and partners really that can help us to exploit this, bringing in both investment and expertise in the medical area. So this is -- sure it's been a really challenging year for us as a company. It's been a year we've had to make some really tough decisions on taking the business forward and I think is a really good chance against stress how much support and commitment we've had from all of our employees throughout this really tough year. And really good in terms of our ability to maintaining supply and maintaining support of all our global customers through this really challenging conditions in the pandemic, which has been a fantastic achievement. Now, we absolutely remain committed to our long term strategy of investing in these really innovative and patented products. We have though, taking these measures, which is really sized resize the business for the challenging conditions that we are seeing at the moment. And what this means is actually we've really had a focus on how do we prioritize what we are working on. For sure, as a group, we have always had, and we still very much do have an abundance of wonderful new ideas for disruptive technology that we think have opportunities for significant organic growth, and very much around the existing markets that we already operate in. So as I said, what we're doing now is looking and making sure we're prioritizing that resource, getting it onto the key projects that we think are the most important bringing in that profit growth in the near future, and also are the ones that are more long-term strategically important to the business. So thank you very much. We will now move over to the question-and-answer session.

A - Chris Pockett: Good morning again, everyone. And thanks to Will and Allen and Will for their presentations. As well said, we're now going to move to questions. We have around 30 minutes remaining. And we'll do our best to answer all questions, but we will of course, try to group similar questions together. So we're going to start with a question now from Mark Davies Jones. Good morning, Mark. And his question is.

Mark Davies Jones: Could you discuss regional sales trends, please? Asia appears to improve somewhat in the second half of the year, is that largely the semiconductor market or a broader upturn in China and conversely, our conditions in the EU and U.S. still deteriorating, given the lag in the machine tool supply chain? And I think you're going to take that one, Will

Will Lee: Thank you very much, Chris. Yes, very good question. As I mentioned earlier, our route to market is through either machine tool builders, semiconductor manufacturers, CMM builders. So actually, we don't have the exact detailed analysis on the different markets, the percentages on where we sell into. What we have done recently is a fair amount of work on understanding and doing our best analysis and information we do have on where we started to. And certainly I think that our exposure to the semiconductor market, electronics market is higher. It's certainly growing, and certainly in our APAC region, that exposure to semiconductor is higher than our other markets. So, yes, we certainly feel that the fact that APAC has held up better is due to that exposure to the semiconductor. Having said that, we've also seen, we believe that the Chinese economy recovering probably quicker after the pandemic, and probably for us also benefiting for automotive and local support for customers there as well. When we look at EU, U.S. and trying to understand it, then at the moment we're in going into August, so we expect Europe to be somewhat weaker. In August in general, I think it's holding up not too badly. The U.S. stats that that came through quite recently have showed a continued deterioration in machines will function in the US. I think this last month they took -- first one -- was the first sign of an uptick, which is very promising. So early days still to say, we're certainly monitoring this closely and we will monitor situation.

Chris Pockett: Okay. Thanks, Will. And another question which I think is going to be heading your way. And this question is from Will Turner. Good morning, Will. And he asks.

William Turner: Are you seeing a shift from Chinese customers to purchase from domestic suppliers rather than Renishaw?

Will Lee: Thanks, Chris. Again another good question. We've always had this for many years now competition from Chinese practice. I would say, if anything, actually over the last six months that our strategy of -- we talked about earlier of making sure we have good stocks in place of vertically integrated manufacturing, which is held -- allowed us to really hold up, supply change during the pandemic. When China and APAC were coming back stronger, and recovering from the pandemic quicker, we were able to make sure we were supplying our customers over there, put us in a really good place. I think that coupled with the fact that we have as I talked about again very much regionally split the local support for our customers that were able to get in and help actually put us in a really good place during the pandemic. We actually had a very nice letter from one Chinese medical customer using our encoder products, thanking us for all of our help in terms of keeping their supply going during the middle of the pandemic making us really critical healthcare equipment with encoder system.

Chris Pockett: Okay, thanks, Will. And another one I think is coming your way as well. The question from Nishant [ph]. Good morning, Nishant.

Unidentified Analyst: What are you seeing in the flat panel display markets?

Will Lee: Yeah, interesting question. So the big driver for us here really is one of the new technologies coming through in that market. And how is that going to drive the need for metrology components embedded into the machines they are going to make it. So one of the most exciting ones here at the moment is micro LED, well, it seems to be quite a bit of all of investments and for the future with tighter tolerances needed for the manufacturing equipment there, which should be driving the need for our newer generation of encoder products. So, yeah, exciting developments on going on there, we will see in the future.

Chris Pockett: Okay, thanks, Will. I think give you a voice slight rest now. I have question, I think, which heading Allen’s way from -- it’s from -- again for Mark Davies Jones.

Mark Davies Jones: Could you comment on your extra -- total financial income and tax rates in 2021 given the distortions to the 2020 figures at these lines?

Allen Roberts: Thank you. Yes, in dealing with a financial income. Financial income is a combination of financial and given expenses, and we expect to see perhaps a similar to the 2019-2020 numbers of the current year. It is primarily arising from currency bounces of intergroup trading bounces and we did take mitigating circumstances of previous year to balance it out. And so, we do expect to see something similar to the current year to what was last year. In terms of tax rate, we do expect to see a more normalized rate as in previous years as for the current year, because of the very low statutory profit this year, small changes in the tax charge to give sort of -- distort the percentages.

Chris Pockett: Okay. Thanks, Allen. And question here, again, I believe this has come to Will. It’s a question from Sanjay Jha [ph]. Good morning, Sanjay. Who asks.

Unidentified Analyst: You have referred to increasing focus on the RenAM 500Q, does that imply that additive manufacturing is less suitable for low volume production?

Will Lee: No, I don't think it does. I think, I am -- as a wide range of applications from high volume to lower volume. Really for us, this is saying that we feel that the key differentiators for us, with our technology and our platform, is for the high productivity high precision end of the market. So that the 500Q for the 250x250 bed size, we have extremely highly productive and therefore low cost part, which is really critical when you're going into high volume manufacturing. So it's really targeting on where we feel we have our innovation has come through to give us a competitive advantage, we're going to focus on that area of the market so --

Chris Pockett: Okay. Thanks, Will. Next question from John Kirsten [ph]. John asks.

Unidentified Analyst: What is the outlook for total sales volume in the next year? High, lower or the same? To you Will.

Will Lee: Yeah. I think this is a question we'd love to know the answer. So we clearly have some really good stuff that we're excited about for the future. A lot of our business have as I talked about is going through these machine tool, CMM encoder builders. So that's key for us with these key accounts, and often our output going forward, and our sales will be dependent on how successful some of these then markets are. So our sales activities and making sure we gain key accounts, maintain key accounts, the outcome for us is dependent on that performance, really.

Chris Pockett: Okay, thank you. And a question here from Siddharth Bhaskar [ph]. Good morning, Siddharth.

Unidentified Analyst: Can you please elaborate on the competitive landscape? What are your key sales challenges? What percentage of new tenders did you lose out to your competitors? Have you lost existing customers to competitors in the last two years? How many? So quite a few questions there. I think that’s Will, and start with that one.

Will Lee: Yes. So let me talk through this probably in general terms. So this is a key metric for us. And again, very much focused on the, what we call the OEM accounts that we have, whether this is manufacturers of semiconductor equipment, electronic manufacturing equipment, machined tool builders, of making sure that we are monitoring and understanding number of key accounts. We are gaining versus any that we are losing. In general, I've been really pleased with the performance of the sales teams here. And we are certainly been gaining accounts over the last couple of years and these are excellent for us then in terms of the long-term business. So I would say it is positive. They're very much for our OEM business, which is great.

Chris Pockett: Okay. Thanks, Will. So question now from John Thurston [ph] again. John says.

Unidentified Analyst: With considerable cash balances £100 million plus, was it necessary to pass on folks dividends? When do you expect resumption of some payments? Who's going to take that one? Will, is going to start with that one. Okay. Over to you.

Will Lee: Yeah. So cash in the bank has always been a really important thing for Renishaw to give us security and the flexibility to do what we want to do and what is best in the business going forward. We felt with the uncertainty that is out there. At the moment in the market, the best thing for Renishaw, was to make sure we have that certainty going forward. So we can take all the opportunities that are going to be there coming forward as the market recovers. The one thing to be clear and to reiterate, is we have so many opportunities here for growing this business, in areas that are very closely related a lot of stuff that we have done for many years here. So we want to make sure we've got the opportunity to do that. So therefore, when it comes to it, cash is the most important thing for us. Allen, you want to

Allen Roberts: From the last recession we learned that the business turns up very relatively quickly and we want to take advantage of that and not be handicapped by risking our investment -- our cash.

Chris Pockett: Okay. Thanks very much. So, we're now moving to a question that's coming in. It's coming from Anthony Plom with Berenberg. Good morning, Anthony.

Anthony Plom: The statement notes that the initial results have been published on the clinical study with Herantis Pharma indicate predictable and accurate placement of or Renishaw drug delivery device. Can you expand on the opportunity here, please? What are the next milestones to look at? I think Will you can take that one.

Will Lee: I can certainly start with this and others may want to add in. So yes, very pleased on performance of our device. Again, I talked about earlier, we've done some fantastic product development on here on some really novel drug delivery technology. So very exciting future opportunity. Clearly, going through the regulatory framework for getting these things through into mass market. Patient Care, it is a journey that we need to go on. This is a really important milestone for doing it. And I talked about earlier this is where we feel that we need the investment. And also, we need the partners to make this happen. The emphasis has really been on making the whole process scalable, and cost effective, namely keeping minimum people in the theater to carry out these operations. So, the whole thing becomes viable and scale.

Chris Pockett: Okay, thank you, Will and David. Now, question for Alan. From Joseph [Indiscernible]. Good morning Joseph.

Unidentified Analyst: A minor not so important question to Alan. Why do you need to do one month forward contracts to manage currency risks on intercompany balances? Are the risks not being eliminated on consolidation? No, economic sense. So, over to Alan for that one.

Allen Roberts: Yes, the contracts in place to basically mitigate the income statement volatility. The simple answer to that one, Chris. Thank you, Joe.

Chris Pockett: Okay. Thanks Allen. Next - another question Anthony Plom.

Anthony Plom: So, big reduction in costs throughout the business, particularly in headcount, how a quickly does this cost returns to the business? Or is some of this a more structural long-term reduction in costs? And I think Will, you're going to take that one.

Will Lee: Yes. So, the majority of this is structural stuff that they put into the business. We have our two priorities; one was making sure we were correctly sized for the future and the other is making sure we're getting better at prioritizing on to the resource on to the best opportunities that we have. Now, for sure, cost will need to return as the business grows, but this is very much then back to the direct cost of manufacturing. So, which is why as I talked buy converse at the start, we tend to have bigger swings in our profit, because the amount of resource we have to put in to fulfill orders to our OEM customers is very much just from other manufacturing resources relatively, though. So yes, mostly structural, not so much if needed, as the markets recover as they inevitably always do.

Chris Pockett: Okay, thanks Will. It's an awful lot of questions. So, I'm going to try to be as fair to attendees as possible. So, we may not answer every single question, still a lot stacked up. So, now going to go to a question from Richard Page.

Richard Paige: And it's a question regarding the work that we did for Ventilator Challenge. To what extent did the additional Ventilator Challenge U.K. work benefit your financial performance in the second half, please? Who's is going to take that one. Allen was going to take that.

Allen Roberts: Yes, we took a lot of work on this project, but it was not particular significance or material amounts in the financial statements.

Chris Pockett: Okay, certainly my understanding Allen is that everything was done in cost as well. We've not -- we're not profitable as we -- Okay. So thank you for that. I'm now going to move to a question from Jonathan Hearn [ph]. Good morning Jonathan.

Unidentified Analyst: Has quite a few questions here. So, I'll do best to navigate through them. So, in your outlook statement, you state challenging market conditions in automotive and aerospace. Can you expand on this in terms of expected decline which is the more important end market and if you need to undertake more restructuring to offset the weakness. There's also a question on additive manufacturing, as an additive manufacturing restructuring refocus, have you had to reset what you see is the potential revenue opportunity, and will it be slower growth? And then thirdly, a question regarding furlough. The furlough scheme, will be £4.5 million from the furlough scheme fully unwind in first half. And are there any other variable costs that will come back into the business in the next 2021 fiscal year? So I think Will probably start on that one and maybe Allen end so. Will?

Will Lee: Okay. So let's have a look at automotive and aerospace start with quite different markets. So automotive tends to be the higher volume market for us, I think we've said that's already, we felt this market has been quite weak some time due to the start of the pandemic given help in terms of demand for vehicles, that does seem to be picking up and there's interesting stuff going on as the migration of dry frame technology brings up new measurement challenges there. We feel our Equator product line is really well suited with flexible gauging for a lot of the size of components that are going there. And we have some really good opportunities there. Aerospace clearly is the one that has changed. And it's really interesting to understand that at the moment. Aerospace is a lower volume for the higher complexity. So it's great in terms of pushing the technology needs for us in the future as a good driver there and tends to be at higher value for solution. I think the interesting bit for us is going to be seeing is, how does the change going through at the moment. And aerospace manufacturers to really focus on new technology coming through, certainly we're seeing acceleration, I would say in additive manufacturing, but also in some of the metrology challenges there as well. So I think it's probably too early for us to say, and it really depends on how some of the support goes for some of those key aerospace manufacturers going forward On additive manufacturing or restructuring, refocusing. So without stretch, we do have a different revenue profile there going forward. So, we are looking therefore at focusing on a smaller number of larger potential accounts, rather than the lower volume which ties back up to the question from earlier where we are focusing on the volume production rather than the low volume production side of things. So yes, a different revenue profiles that we’re expecting, but one that has the opportunity for the large growth over the longer-term. I think that the military side has been accelerated and also the face side of the aerospace business is still buoyant.

Chris Pockett: Okay, I think the third part of the question, Allen you're going to answer that.

Allen Roberts: Yes. And with respect to the third part of the question for costs and will they be repeated in the first half, there will be some benefit in quarter one, but not to save expenses. It was in the second half of last year. Our staff are now back on full time pay. So there will be a slight improvement there. And there will be some recovery and preferred expenditure on government institutions, potentially more than we have in the first half. But our significantly lower cost base expected in the -- this half versus the last.

Chris Pockett: Okay Allen. Thanks very much. We still lots of questions to get through. So I'm going to give you opportunity now for question from Xing Lu [ph]. Good morning, Xing.

Unidentified Analyst: So this is a follow-up on the Chinese competition question. So how much of a technology lead do you have over local players in China? And do you see local competition catching up as we've seen in some of the automation, hardware space? Second question on manufacturing, you mentioned key customers. Could you elaborate which key industries you are targeting besides BAE Systems and aerospace, which you mentioned? How much do you envision this business to grow in the medium term as a percentage of whole group sales? So a couple of more questions there. So Will kind of take it probably be the first one, over to you.

Will Lee: Yeah so, relative to local Chinese competition, we still feel we have some really key differentiators. I think products like our encoder product line, which we saw many different electronics -- some customers actually, it is a combination of things that customers are looking for. It's a very much a proven track record. It's a relationship they have with us and they know that we deliver both excellent technology and metrology, but also extreme reliability. And if you're imagining the importance of that on a £0.5 million piece of equipment with the encoder, but what we can show to them in terms of our manufacturing and in build quality is absolutely essential for them. And the same goes with a machine for product line, same in product line. So in terms of, AM I thinking of some other questions on there? So other -- clearly there was a broad range of different industries, which all have volume applications, or additive which we talked a bit about in the past. I guess what I know we're growing again, just a thing from earlier is the electronic side of actually just because of the size of our industry these days, that there are interesting applications there, which actually that the volume of stuff you end up doing with electronics, just to the size of the market compared to something like aerospace can be huge.

Chris Pockett: Okay, Will. Thanks. I think it probably makes sense. We got the question from Melanie Nileway [ph]. Thank you for attending. The question here is.

Unidentified Analyst: Are there any changes to your long-term assumptions on the opportunity and competitive landscape in the high end part of the metal additive manufacturing market? What specific innovations are key parts of the roadmap? Will you probably start with that one?

Will Lee: I suggest David -- I start and I can imagine that David would want to add a few bits on this at the end. And so if we look at it, so one of the drivers here for us, so we've talked about productivity multi-laser machines, really this is all about driving down the cost per part. So, we have enough people now that really understand the benefits that they can get, not just from printing apart they always used to, but actually designing something to be getting the benefits of what can be done from additive manufacturing. So I think that part of the message that people are understanding that taken a long time to come through as manufacturing industry often does, but there is a real understanding now people experienced with additive manufacturing, wanting to push this forward. The barrier then is the performance advantage you get thus is the additional cost of that part from additive manufacturing. And this is where the innovations that we have done and the innovations that we are looking at will speed up that manufacturing process, and therefore reduce the cost of that part further. The other bit, we'll come back to them precision. And actually the innovations that we'll be looking at that we're going to talk about the moment of incentive using multiple lasers and tying up the metrology of those to make sure you can do the most precise parts with the benefit of all the lasers at the same time on the same part will be key for a number of industries as well.

David McMurtry: And the next generation machines will certainly address what's the problem at the moment is the cost per part is very high, and that means that there's a relatively very few parts where it has value, its still an economic gain to use. But the next generation will address the price per part, but also the precision of the part and very good the total reliability and automation of the total system, but that is next generation.

Chris Pockett: Okay. Understood, David, well we will stay with 3D printing or additive manufacturing. Another question from Anthony.

Anthony Plom: Has your opinion of 3D printing changed following COVID-19, should the customers look to new source production and d-risk supply chains? Will, can you just talk about that?

Will Lee: Yeah, sure, for that one, very good question. I think it's actually broader the additive manufacturing part of this year. What we are certainly seeing is a -- and we've seen this ourselves actually from reviewing our supply chains during the pandemic that you really want to understand where parts are being made, and how much exposure you have there. So certainly, we are seeing more and more talk on migration of supply chains from different countries and bringing that back more locally. I guess, it's something that we have always done a lot of ourselves very much here locally because we have invested in low or highly automated manufacturing, which allows us to do that. So I guess this is something of all that we see as a real positive for us in terms of if that is we onshoring of manufacturing as great in terms of demand, but also to get it cost effective to do that really drives the need for the automation and therefore the metrology that we thought to buy.

Chris Pockett: Okay. Thanks, Will. And I’ll take a question now from Sanjay Jha again [ph], is CapEx expected for further in 2021, and I'll put this out to Allen.

Unidentified Analyst:

Allen Roberts: Thank you very much. Yes, we are expecting to see capital expenditures drop significantly this year. As I said earlier, we do have -- we don't have any major property terms occurring in the current year and capital expenditure on plant equipment will be significantly lower. And there's more likely to be CapEx on IT infrastructure, but certainly significantly lower than last year.

Chris Pockett: Okay, thanks, Allen. And another -- where are we? So, question from Mark Davies again.

Mark Davies Jones: So given the recent improvement in China machine tool data, what are the key drivers behind your relatively conservative outlook?

Will Lee: So we're certainly making sure that we have a conservative view of things. We're looking at making sure that we are budgeting according to a high degree of uncertainty, which I don't think anyone can argue. It does not exist in the market at the moment. If things pick up and there is a higher demand from the OEMs that use our technology then we know we have the manufacturing capabilities to scale things up quickly, the stocking policy can make sure we can do that, which we spoke about early on. So I think among other things, we'd much rather be cautious and give ourselves the flexibility there.

Chris Pockett: Okay. Thank you, Will. We move now next to a question from Kathleen McMillan [ph]. Good afternoon, Kathleen.

Unidentified Analyst: Could you please provide more detail on the ambitions for the newly created Renishaw neuro solutions? Will, we’ll start with you.

Will Lee: So I think we've touched on some of this already. So we wanted to really reflect the difference in the neuro business to the best of Renishaw. So that’s how its own, very much its own vision. The new setup also allows us to really take what we view as a very exciting technology and its relatively early stages still here of the regulatory process, something that we now feel with the design work that’s going on is not just a very good solution in terms of its precision, but also in terms of its scalability and its ability to be rolled out into the mass market cost effectively. That's clearly going to take some time still to come through. And the purpose of neuro solutions is to allow a separate vehicle to do that for both attracting partners with really some of the right experience to help us through, so we've done a great job in the technology field. Probably we need some -- we may benefit some partner reading about this, if you have experience in the healthcare field.

Chris Pockett: Okay. Thanks, Will. Next question here from Jean Roche [ph]. Hello.

Unidentified Analyst: I would like to ask about management’s attitude to acquisitions and M&A, if this has not already been covered? Will, start with them.

Will Lee: So here we have cash in the bank, which gives us flexibility if there was something that came along. It's certainly not our strategy. Our strategy is investing in organic growth. We have so many great opportunities here within the business to invest in, and that is, from our track record, we feel we have the best opportunity of delivering the best possible growth, the long term. Now that's not really something if something came that was well suited to areas of our market that are very close to what we do and was a possible business then we would certainly always consider, but it is not a key part of our strategy going forward.

Chris Pockett: Okay. Thanks, Will. And next question from Robert Davis.

Unidentified Analyst: Outside or aerospace and automotive, could you provide some additional details on key end market developments and what are your current priorities from an R&D standpoint?

Will Lee: Yeah, so I mean, interesting but here we probably can't talk about. So the interesting stuff we've got -- going on in terms of R&D and things that we want to keep very quiet on. And actually in general, we are keeping quiet around our innovations and for strategic reasons and making sure that we can exploit them in the market even first. There are -- the nice thing here is there are Metrology challenges in both of those markets, so the new stuff either with the changes in auto around EV, and again, most of the stuff is confidential with people that we work with on what our Metrology challenges are, that clearly -- that this industry is going through a massive challenge in terms of working out. Okay, how do they design their own vehicles? What tends to come to a little bit later having design that work and that the tolerances that are needed and what are the things that they can and cannot measure. And as I did mention, I think we've got some with the size of the parts, we have a nice platform with our gauging technology to suit and also the reverse suit quite well as well. From an aerospace, as I mentioned, the aerospace is always challenging, really here is making sure that we can do more things on one setup. And we have some interesting new sensor development in coming through, which we think will make some, some real advances there as well. So yeah, exciting times, but not stuff we can talk about at the moment.

Chris Pockett: Okay. Thanks, Will. I think that also covers off Molina's [ph] question regarding the areas of EV that we're working in military service. So next confidentiality that so we can't comment further. A question here from Mark Davis Jones, I think we're really towards the end of the questions. And I think most everything else has been covered off and answers already. This could well be the last question.

Mark Davis Jones: Could you comment on the outlook for costs in 2021? What is the balance between the continuing benefit from the restructuring undertaken this year versus the dropping away or short term measures and government support schemes and that one is towards Alan

Allen Roberts: Thank you. We ended the year with just short of 4,500 staff and the average for last year was 4,800. So we are expecting to see lower costs in 2021 versus last year, and a lot of the restructuring costs will have an impact in the current year. And, so there will be a reduction in the benefits that we've got from the short-term of the government incentives. But I think we will be outweighed by the lower headcount that we had relative to last year continuing to be focus on other overhead costs.

Chris Pockett: Okay. Thanks very much, everyone. Thanks for all of your questions. I think we've answered pretty much everything as best we can. So that now ends today's Q&A session and ends the webcast. We'll aim to publish a recording of today's presentation and the Q&A session on the Investor Relation section of our website by tomorrow morning. So on behalf of Renishaw, just like to thank you all for attending today’s event and hopefully it has been a value to all of you that have done so. And finally, just a reminder that you can download the report preliminary report and a copy of the financial presentation that you've just seen from our Investor Relations web pages. Again, thank you for attending, and have a good day.