Earnings Transcript for RSW.L - Q4 Fiscal Year 2023

Chris Pockett: Good morning, everyone. My name is Chris Pockett. I'm Head of Communications for Renishaw. I'd like to welcome you to this live Q&A session for Renishaw's half year results for the period ended December 31, 2003 [ph]. Hopefully, you will have the opportunity to view the video presentation that was released as part of this morning's RNA statement. And Will Lee, Chief Executive and Allen Roberts, Group Finance Director are here now to answer any queries that you may have in relation to that presentation and the results statement. They will try to answer as many questions as possible, before we close around 11

A - Chris Pockett: So we're going to start with the pre-submitted questions. And the first one is on the sort of market related. On the strategic goal to increase technology value through data monetization, how do you plan to compete with the larger names or names with greater software offerings and how can Renishaw win in this space? I think that one's going to go to Will.

Will Lee: Thank you, Chris and good morning, everyone. So here from data monetization, we're talking about the central platform that we've talked about in the webcast presentation. Some background here I guess, wherever you go around the world in manufacturing facilities, you'll see a huge range of different equipment. The one normal constant is that you will see a Renishaw sensor for probe one of those machines. So we are gathering data at the point of manufacture at all of these sites. This puts us in a good position. What we want to do to exploit. This is not folks have not have a generic shuffle data capturing system. There's plenty of those out there which serve a purpose, but focus on specialty, which is very much around using that data for process control and making decisions, particularly that keeping our manufacturing sites running 24/7. So we think we have a quite a differentiated product here. We will collaborate with others, whether that's software providers or the hardware providers to our customers the flexibility to get the most out of those. Still early stages and we are in some key trials now with some significant customers to really understand the value proposition and the benefits they get from our new platform.

Chris Pockett: Thanks Will. And second question now relates to on spectroscopy business. So any comment on geography or customers that are supporting the strength you have seen in spectroscopy? And that one's going to go to Will.

Will Lee: So very broad here and hard to tie down and so on a range of different industries that we've seen and different specific countries. So I don't think there's any huge theme. We talked in the webcast about EMEA, having done well but it's actually quite a broad picture here nothing really to call out.

Chris Pockett: Okay. Thanks, Will. And a question here on the growth rate. Can we please get the H1 growth rate broken down into price versus volume? And I think that one's going to go to…

Allen Roberts: Thank you, Chris, and good morning, everybody. Yes this is quite a complex picture on this one but then there's a range of factors and it's very difficult to give a definitive answer. We have implemented price – targeted price increases in some product lines, which have benefit – that benefited us by circa $7 million. However, we sell a wide range of products through different channels. So a changing customer mix affects the net pricing. Overall, we estimate that net pricing has been broadly – broadly flat during the period. So the revenue change is primarily due to volume.

Chris Pockett: Okay. Thanks, Allen. This question relating to outlook. So, what are the specific signs of market condition improvement? You're already seeing that makes you confident to guide towards an acceleration in H2 in light of a stable order book? And I think, Will, you can too deal with outlook.

Will Lee: Yes. So, looking forward to this half, the second half, I guess there's a few things that we're hoping to see play out. The APAC region, our largest region with the single most important thing is the semiconductor demand, electronics pulling through the encoder business there and still a bit early but we think we see some signs that coming through from our customers to give us the confidence there. Pretty slight different picture in Americas and Europe, and here actually, it's more of a capital goods that we see coming through for better H2. So, some in terms of orders and a strong start to the year and then a growing confidence going forward for the rest of the half. So, slightly different factors across the group, which give us the confidence in albeit a large range in terms of turnover for the end of the year our confidence in that forecast.

Chris Pockett: Okay, Will. And linked to that question, how much of the anticipated business acceleration in H2 relies on general market improvement compared to your highlighted range of growth opportunities and new products gaining traction and that's another one too.

Will Lee: So certainly when we talk about some of the big drivers here, it's actually existing customers ramping up in terms of their demand. Now that may well be some of them which we managed to migrate them to some of our newer products through the back-end term whatnot. And they have more time to work with us on integrating our latest products. But it's really existing customers, existing business there. There's some positive. We've talked about Fortis, in terms of growing number of machine tool builders. Now buying these things do take a long time to come through and really be significant. And we also had on some of the capital goods to those come through quicker, a really positive response, for example, on the new RenAM machine from formats and those sales will come through relatively quickly with new customers but they want to get the real benefits of the productivity of that machine.

Chris Pockett: Okay. Thanks Will. I think there's another one that's coming your way. How and by when do you expect the significant build-out of chip manufacturing capacity in the US to impact your business? And is this already a topic in conversations with your customers today? That's number one for you, Will.

Will Lee: In general, our discussions with our customers are far more around their demand and what they see for us. The bigger impacts us recently trying to understand has been understanding their inventory levels of our products they bought from us and their inventory levels of finished goods that they have. It's really complicated that we're dealing with a whole bunch of different customers here who have a number of different products that they are selling into different stages of predominately back-end semiconductor with the optical encoders and front-end more, it's front-end inspection with the laser encoders. So it's quite a few different areas driven by different technological demands coming from their customers. So we don't tend to look too far at some of the more macroeconomic stuff going on with semiconductor manufacturing we tend to focus on have more discussions on the immediate demands commentary from our customers and make sure we're ready with a, what they need in terms of delivery and b, in terms of product performance.

Chris Pockett: Will, thanks. And the question here, can you elaborate on the key moving parts impacting the wide H2 guidance range for revenue between 4% and 16% growth and the profit margin range 19% to 23% versus this one's going to be split between you want to start with this one, Will.

Will Lee: Yes. So I guess this builds on the question we answered earlier here. So we're going into new year with a good order book around a couple of months of order book increased confidence on capital goods in Europe and the Americas, and also increased confidence of the recovery that may have been going on for almost 18 months in our encoder business with semiconductor manufacturing. So, that's the main things we're looking at there in terms of this improvement in the second half.

Allen Roberts: And with respect to profitability the main driver there will be the drop-through for the additional gross margin arising from higher revenues. We believe, we have sufficient capacity to handle the anticipated weighted demand without any significant increase in the fixed cost base. And also we don't see expect to see a massive reduction in inventory in the second half. So the absorption of overheads in half two should make up to show an improvement in that.

Chris Pockett: Yes. Okay. Allen, another one coming your way, I think when do you expect currency headwinds to abate based on current prevailing exchange rates those back to you?

Allen Roberts: Yeah. Okay. Thanks. Yes, things for the second half based on the latest exchange rates and the forward contracts in place for half two, we do not anticipate any significant currency impacts versus the first half and moving into fiscal year 2025. We do have better forward contract rates both the US dollar for 2025, so we would expect to see some currency benefits next year if exchange rate remain as they are today.

Chris Pockett: Okay. Thanks Allen. And another one coming your way, I think, why are you reducing inventory if anticipating increasing demand? And do you expect an inventory rebuild from here into the market recoveries?

Allen Roberts: We did have a targeted inventory reduction in areas where we had excess stock following the last up-cycle like many firms we experienced difficulties in sourcing some components, especially semiconductors, which lead us to place long lead time -- long orders and extend our lead times, stockholding -- safety stock holdings. But as the demand has fallen, we have -- and supplier lead times have improved, we find ourselves with more stock and the way we meet in certain areas and as we said at the full year announcement. And as we also signaled at our Capital Markets Day last year and previous webcast, we have a planned reduction of these supply chains as they have normalized. We've increased production rates in some of our product lines in anticipation of the half two growth and expect inventory to continue. But we do expect inventory to continue to fall in half two.

Chris Pockett: Okay. And another inventory related question here. So how large was the impact from inventory reduction and currency on gross margins and percentage points respectively?

Allen Roberts: We estimate that about 1% to 3% reduction in gross margin. It was currency -- was gross margin, but 2% was currency impact.

Chris Pockett: Okay. Thank you. I’m keeping you busy. There's another one I think coming your way. Is it correct that the £1.9 million severance payments have not been excluded from adjusted profit before tax even if one-off in nature? And if so where is that £1.9 million included in the profit bridge on slide 5?

Allen Roberts: Yes, the £1.9 million has not been excluded from the adjusted profit before tax and the cost has been allocated across the various functions. So a number of items in net profit bridge our impacted.

Chris Pockett: Okay. Thank you. I’m going to give Allen a rest now, and one for Will, do you anticipate any further workforce reduction or severance scheme payments?

Will Lee: So, no, nothing significant planned there, so rationally. So where are we talking about targeted recruitment in some areas, estimate the best opportunities that we have and some direct recruitment in manufacturing. And we'll constantly look at making sure and focusing on this more actively and really balancing make sure, we got the right resources and the right people then to deliver on opportunities that we've got. So, nothing significant than that.

Chris Pockett: Okay thanks Will. Short restaurant Allen, why did you decide to conduct the insurance buy-in of the pension liability?

Allen Roberts: Yes, our strategy was to undertake a buying and at a time when it could be achieved from the fund assets and with no further funding required from the company. And the reason, the recent market conditions allowed for the transaction to be completed and there were around £10 million of assets remaining in the fund. And as a result, we going forward, we have mitigated our future funding and a balance sheet and protecting the balance sheet from two significant future funding adjustments.

Chris Pockett: Great. Thanks. On this one on capital allocation side, coming back to you, please elaborate how you think about capital allocation given the significant expansion cycle with Miskin comes to an end, when Miskin comes then on your end markets are bottoming out. How do you balance the group's financial policy on net cash potential M&A opportunities dividends and share buybacks?

Allen Roberts: Thank you, Chris. And as we've outlined previously, we continue to prioritize our organic growth through investment in engineering and R&D capital equipment and with a capital expenditure and working capital and we will continue to allow to align this organic investment in line with the growth opportunities that we see in front of us. And at Miskin, we have completed the basic construction of the additional holes. And we're now in the process of fully fitting under -- in installing production equipment to undertake production, principally our large our larger capital plans and the products. We’re also positive putting in investment in centralized European warehousing and logistics. And we are replacing a number of our older fully depreciated machinery and more automated equipment as a part of our on going focus on improving productivity. And as previously mentioned, we also maintain minimum cash to support the business through any downturn. And we continue to consider appropriate M&A to augment our organic growth strategy. We maintain a progressive dividend policy to ensure that investors share in the proceeds of our business growth of the longer and we have no current plans for any share buybacks in the immediate future?

Chris Pockett: Thank you. I think this one's hitting Will's way. Additive Manufacturing seems to be going through a bit of a lull and noted from a question in the desktop until recently announced 20% headcount reduction. You talk of up to 9% increase in productivity with the latest AM development, this does not sign sufficient to move the tipping point to mass adoption. I stream growth here is one of the reasons for the Miskin expansion. Will, you can pick up that.

Will Lee: Okay. So yes news here yet. There is tougher news around additive. Actually for us it feels with the nice positive times we had for our additive business. I think you have to put the contact center back in 2019. We made some strategic calls to get the business very focused. We -- tough decisions on consolidating manufacturing on one side, consolidating R&D on one side, pulling out of certain markets over in Asia and focusing on key accounts focused on those sort of repeat business. People needed highly productive machines in Americas and Europe, that strategy has put us in a really good place. And we're certainly starting to see the benefits from that now. I think the real buoyant stuff is from Formnext, the launch of our new TEMPUS machine. And here, this is not a 9% increase. If it was, we would not be excited. You're quite right. This is up to 50% improvement in productivity. The more productivity is when you're making parts that are less dense, including thin walled parts of all you -- just the additives, because they are quicker and are less carbon intensive as well. So some real stuff forwards there in terms of productivity. They've been really well received by our customers. We've got some really nice key accounts coming through, both in Europe and America. We're actually looking at probably putting in more resource, particularly in the US to make the opportunity of the product innovations that we've got there. So yeah, really positive and we are continuing to invest here as one of our newer businesses in the future with exciting developments on the next generation of technology coming through. And just finally on that, yes. So, one of the reasons for Miskin expansion is to cope with these larger capital goods such as AGILITY, FORTiS and the RenAM machine as well.

Chris Pockett: Okay. Thanks Will. And the last of the pre-submitted question. So thanks to those of you online being patiently waiting for your questions to be answered. You sound more positive on semicon. The drive to AI clearly provides positive macro. And the questioner just wonders what the evidence is on the ground?

Will Lee: So, yes, we are more positive on semicon. It's been a while and it's still early stages, but the signs are there from our customers in terms of forward-looking and orders that things are starting to improve. Exactly, what the drivers are then our main source of information here is from talking to our customers. Their equipment goes into a wide range of different fabs. I don't even really think they know exactly what the drivers are. So, I would not want to say whether this is AI, automotive or something completely different. We just honestly don't know.

Chris Pockett: Okay, Will. Thank you. So we're now going to move to questions submitted online. There's a multipart question here. So I'm going to read this out and I'm sure we'll break it up in bite-size chunks. So what are your semicon equipment customers saying? When do they expect activity to pick up? Is this related to the H2 market conditions improving? Secondly, what is the size and visibility of the order book? Also, are there any orders coming in for position encoders? Third part of the question, what is behind the AM year-on-year sales decline in H1? Have you been losing share? And the final part is, how much more inventory reduction are you targeting? So I think we're going to start with Will.

Will Lee: Okay. So let's go through these one-by-one. Semiconductor equipment customers, I think we've probably already covered most of that. So we are definitely seeing signs there of improvement. And this is important for our second half -- size and visibility order book. So, we're pretty healthy that with around two months, which is good for us actually it could be all the time. We are orders coming in for position encoders, but we're starting to see signs of those improving from what's been a real low. At the AM year-on-year is pretty much a timing issue. So sometimes, we'll get a few larger orders and the phasing of those. So in terms of losing share, then I mean, you got to look at this and where we were and additive were in metal powder bed fusion were only in the medium size of machine [indiscernible] that the high productivity, so machines designed for manufacturing rather than R&D there. So I mean that Nish we think we're doing well. But so far early, we think we can probably start to accelerate that probably more now. And we will be probably, a different person more resource from the sales side. In terms of the inventory, then there really can be a shift. As Allen mentioned, we have had some components stock in place there for stuff that we've built up during pandemic times and working our way through, so reducing but also to make sure we're ready to respond quickly both from electronics consumer, electronics as some of the capital goods areas will be increasing as well. So we are we have been recruiting for some period making cables over in India and some of the other assembly facilities to make sure that we're ready to respond, because when we do get orders, we don't get very much time on our export customers. One of the things, they expect from us is not just performance. It is every client.

Chris Pockett: Okay. Thanks, Will. Next question, China. China appears to have been strong in the period. Can you please discuss what is driving that and how sustainable, you think that may be? Is there still some post-COVID reopening catch up in this. And that’s over to you Will.

Will Lee: Yes, China is interesting. So having been over a couple of times not too long ago. So recently, you can see I don't think this is a post-COVID reopening catch up. This is very much the scale of the investment going on, that is still huge. And so from visiting machine tool builders CMM manufacturers, automotive manufacturers, semiconductor, there is massive investment going on in the future, of which with our products I think we're really well positioned to exploit and we're looking at quite a few strategic initiatives that we think can help us through really continue to grow our China business over the next five to 10 years. So, that clearly, has some macroeconomic stuff there, but we feel pretty positive on China and the opportunities and our structure to make the most of those at the moment.

Chris Pockett: Thank you. And just a question relating to machine tool business. Large order backlogs of food chain to companies built up during the supply chain crunch now appear to be eroding. Are you convinced the end demand will pick up, before lower order intake during the last year depresses reduction.

Will Lee: Yes, it's a good question. Clearly, I think, particularly with the higher value more high end machine tools five axis than there certainly has been quite an order backlog, and some of our customers have been using some of that at start. And in this sort of more commodity vertical machining center, there was certainly a low that seems to have stabilized activity at those machines on a much shorter lead time for our machine tool customers. So exactly how that plays out. So we have a bit of uncertainty in the plan around the more established markets. So, Germany, US, Japan in terms of core machine tool consumption. But still I think there's an overall healthy demand there.

Chris Pockett: Yes. Thanks, Will. And the question here this relates to profits from associates. So our JV profits were up nicely in the first half. What is driving that? And would you expect it to continue in the second half? Who's going to pick that one up?

Allen Roberts: Yes. This primarily relates to JV RLS based in Slovenia involved in produce, design and manufacture ASIC [ph] encoders. And yes, they had a very good first half, particularly from a large customer. They're trading very well, but probably the -- not to repeat exactly these same -- in the second half as they did in the first half. So, expected to be slightly lower in the second half than the first half.

Chris Pockett: Thank you, Allen. Semiconductor related again. We heard recently that ASML talk up medium-term semiconductor CapEx outlook materially for 2025 and beyond. Themes that seem -- that drive that seem to be quite generic, for example, AI, should we expect Renishaw to benefit from the structural trends as well? I think, we probably answered most of that already, but, Will, do you want to just chip in.

Will Lee: Yes. I think we talked about the first bit of really not being aware of exactly what the drivers are for our customers. I mean, ASML interesting one, big name there. The nice thing with all of these is that their demand for precision is constantly going up. So they are providing a really nice driver for us, pushing the boundaries for new products coming through to make sure that we can deliver for them what they need to go out to deliver for their customers in next generation of chips.

Chris Pockett: Thanks, Will. Question here on efficiency drive. So given the software focus and continuous efficiency drive, could gross margins move higher from the traditional 50% to 53% in the long-term? Who is going to pick up on up? Will, start with that one.

Will Lee: So if I talk about the two strategies to start with, so software, clearly key for us. The biggest part here in terms of the MODUS software we launched with gauge control, I think really worth mentioning. So not only trying to drive our software revenue stream, but also simplify our route to market and improve our profitability that way as well. So had a double attack on group profitability there. And in terms of come -- to numerous efficiency here clearly it's something that we are making sure with all the opportunities we have in both the underlying markets and the opportunities right performance. We want to make sure we are resourcing the better those opportunities well and doing that by being as productive as we possibly can and cutting out areas where we just need to focus on. So I think we got positivity there in terms of sort of banked some longer-term in terms of financials that if anything Allen do you want to answer that or not?

Allen Roberts: Yes, it was executed. Yes, it will help to improve our margins in the longer term, but it'll take it will take some time to achieve significant revenue growth from the software revenue.

Chris Pockett: Okay. Thank you. Question relating to one of our markets. So precision money fracturing from your great strength is with customers in precision manufacturing. Are there any significant new customer industries being targeted? That went out to Will.

Will Lee: Not really here. I mean we've talked by some of the drivers here in terms of all those markets the need for more precision, more automation coming through, but they tend to be one underpinning or the end-user markets that we sell into. Actually, we are as we've talked about in our strategy diversifying into close markets. So we're making a bigger play on the robotics area also I think it's been interesting seeing what launching our new sort of world's smallest wireless machine tool program. Actually, I'm a machinery that was already small machines that we didn't realize there was a need for until we started to show what we have done there. So small areas, nothing really significant. I would say on – top I've already talked about.

Chris Pockett: Yes. It looks like we just have one more question. So on the last calls and please submit now. And so the final question. Please can you remind us of your normal order lead times across your main product categories? And I’ll start Will on that one.

Will Lee: It sounds like we can have an order. That's good. So this is quite variable. So clearly, we'll have customers that will work on the delivery plans and scheduling. We'll then have customers we do that with that still change quite quickly in terms of demand on us. And we will find that with core products such as encoders, machine tool probes, actuators. We are quite well geared up to be able to very quickly respond to quite large orders in those areas. There is that in more specifics after the other end of the street. If you come along and you authorize a specific size of CMM and then that will clearly take a few months for us to manufacture a custom machine. So quite a range there from the instant to a few months.

Chris Pockett: Okay. Well, thanks very much. That's all the pre-submitted questions and the questions were submitted via the webinar app we've dealt with. And so that now ends today's Q&A session. We'll aim to publish a recording of this webcast on the IR section of our website by tomorrow morning. So on behalf of Renishaw and everyone here, like to thank you all for attending this event and have a good day.