Renishaw plc (RSW) Earnings Call Transcript & Summary

Good morning, everyone. My name is Chris Pockett, and I'm Head of Communications for the Renishaw Group. 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 question-and-answer session in which we will try to answer as many questions as possible before we close at 12:00. No questions will be answered during the formal presentation. [Operator Instructions] 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.

Thank you very much, Chris. So clearly, it's been a challenging year for us as a group with the economic conditions that we have faced. Our revenue was lower at GBP 510 million 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 position encoder product line. So this includes our optical encoders, laser encoders and our magnetic encoders, and this is 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 a postponement with elective surgery, a reduction there with the pandemic. And now as we talked about before, we're a relatively high-margin, high-fixed cost business. So with lower revenue, clearly, our profit was adjusted more. And adjusted profit before tax was down to about GBP 48.6 million. The statutory profit due to some restructuring charges and actually some impairments due to fair value of some ineffective hedges was down at GBP 3.2 million, and 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, a restructure, in particular, of our additive manufacturing business, which I will go through in more detail later, and Allen will talk to the financials on. I'm really looking 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 decided not to pay a final dividend. We did spend money on capital expenditure, a majority of which was 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 GBP 120 million. We are continuing to invest for the future, but with a real focus on making sure we're most -- making the most of the investments that we have already made and with a real focus on prioritization to making sure we're making the most of the really excellent assets that we already have within the business. And I'll talk to a bit more on this later, too. So I will hand over now to Allen Roberts, who will talk us through the financials in more detail.

Thank you, Will, and good morning, everybody. By way of introductions, Will has 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 have undertaken 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 GBP 510 million, lower than last year by 11% and 13% lower at constant exchange rates. Adjusted profit before tax is GBP 48.6 million compared to GBP 103.9 million in the prior year, giving a return on revenue of 10% compared to 18% 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. The following items are excluded from the adjusted profit before tax. Restructuring costs. We have taken a number of difficult decisions to the year relating to the reorganization and recycling of certain activities, particularly in our additive manufacturing business and the wider redundancy program undertaken in the second half of the year. Restructuring costs in the year totaled GBP 23.8 million, of which GBP 17.5 million was attributable to our AM business and GBP 6.3 million to our wider redundancy program. During the year, we reduced our highly probable and more than likely not revenue forecast of 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 ineffective with fair value losses on financial instruments not eligible for hedge accounting being GBP 21.6 million in 2019 at GBP 6 million gain, in accordance with IFRS 9. These losses have had no impact on our cash balances. The result of the statutory profit before tax was GBP 3.2 million compared to GBP 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 rate this year are: there was no patent box benefit this year, last year, there was GBP 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 deferred tax rate in the U.K. from 17% to 19%, resulting in a charge of GBP 1.1 million; and thirdly, the partial derecognition of deferred tax assets for U.S. tax losses and excess interest due on increased uncertainty over future trading levels giving rise to GBP 3 million tax charge. Earnings per share on an adjusted basis is 51.0p and 0.4p on a statutory basis. Following the onset of the pandemic, the interim dividend, which is already being waived by all directors, was canceled 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 that reconcile the adjusted profit before tax of GBP 103.9 million for last year to the GBP 48.6 million this year. The significant movements are: a GBP 48 million fall in gross margin, largely result of lower 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 GBP 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 GBP 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 anticipated is now less predictable; reduced distribution costs principally due to lower staff and other operating costs such as exhibitions and travel costs; the adverse net year-on-year movement of GBP 10.3 million across financial income and financial expenses relates mainly to currency volatility on intragroup balances. Last year, financial income included currency gains of GBP 5.9 million compared to currency losses of GBP 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 GBP 221.3 million compared to GBP 237.4 million in 2019. This year's costs include GBP 4.5 million of income from government grants to support job retention during the pandemic. Group head count reduced by 578 people, 11.5% during the year, with a closing head count of 4,463 at 30th of June, 2020. The average head count in the year was 4,797 or 3% below the prior year average. Adjusted profit before tax in the second half of the year was GBP 34.3 million compared to GBP 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 for job retention; favorable currency and foreign exchange rates versus the 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 GBP 60 million at the year-end, GBP 12 million lower than June '19. The fore relates to GBP 16 million of capitalized development cost impairments referred to earlier with GBP 6 million of this included in restructuring costs. Right-of-use assets of GBP 13 million and lease liabilities of GBP 13 million, both current and noncurrent, are new lines on our balance sheet this year and arise from the adoption of IFRS 16 leases effective for the group from the 1st of July 2019. The assets comprise mainly leased properties and vehicles around the group. Deferred tax assets have increased from GBP 30 million to GBP 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 GBP 24 million since June '19, reflecting our management of inventory during the period of reduced demand and reflecting GBP 4.9 million of additional inventory provisions included in restructuring costs. Debtors has decreased by GBP 15 million since June '19, with trade receivables reducing by GBP 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 '19. Net derivative balances, which represent the fair value of foreign currency forward contracts and options yet to mature now total GBP 59 million net liability compared to GBP 51 million net liability at June '19. This increase is -- this increase arises mainly from the weakening of sterling against the hedged currencies during the year. Pension scheme deficits now totaled GBP 65 million compared to GBP 52 million in June '19, 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 GBP 11.8 million have mitigated the impact of the discount rate change. Net assets equal to total equity have reduced by GBP 36 million to GBP 548 million, mainly as a result of the final dividend for 2019 of GBP 33.5 million paid in October. Turning to cash flow. The Board has increased its focus on cash preservation during the year due to the prevailing challenging global economic conditions followed by the pandemic. As previously discussed, the number of actions were taken to reduce operating costs, and we've also reduced capital expenditure and expenditure during the second half of the year and canceled the interim dividend. This cash flow bridge tracks the movements from our opening cash and bank deposits' balances of GBP 107 million to the closing position of GBP 120 million. Our profit after tax before noncash items and new product development engineering costs gave a cash inflow of GBP 144 million. We've seen a further net GBP 33 million cash inflow from changes in working capital, with decreases in debtor and inventory balances more than offsetting a reduction in payables. Cash flows relating to investment -- investing activities, included new product development engineering costs of GBP 67 million and capital expenditure of GBP 39 million. More on this shortly. The final dividend for 2019 of GBP 34 million was 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 3-year viability period assessments. To finish our results review, a few words on capital expenditure during the year. Total capital expenditures was GBP 38.7 million, of which GBP 24.6 million related to property. GBP 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 GBP 10.3 million. Major additions were: in the U.K., the completion of the 94,000 square foot extension to our Renishaw Innovation Centre at New Mills, acquisition of property in Pune in close proximity to our existing facility to provide capacity for future growth, refurbishment of a building purchased in Nagoya in Japan last year and construction of a new facility for Renishaw Fixturing Systems (sic) [ Renishaw Fixturing Solutions ] in Michigan, USA, which was completed in April this year. Expenditure on plant and equipment for the year, including IT infrastructure, was GBP 14.1 million. And looking forward, there are no major planned property expenditures in the current year.

Thank you very much, Allen. So now we're going to take a little look across the business on what's been going on. I'm going to start with having a look at the business environment, and we'll have a look at some of the industry sectors and some of the changes there going on. So we talked 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 EV investment. But in general, that remains quite weak. Aerospace as when the last time we spoke, we're still quite buoyant, but clearly impacted by the pandemic. We do still see a need for a research investment there. And some people think, actually, there 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, as I talked earlier, is very much recovery in the semiconductor market. Many drivers for this, which I will talk through in a bit more detail later on. Now actually, how we sell into these markets is often very much still through machine builders. That might be manufacturers of semiconductor equipment, electronics equipment, CMM manufacturers or machine tool builders. In particular, one that's really important for us is the machine tool builder market and all the industry sector analysis there shows that, that market has been weak and has been getting weaker, whether that's the JMTBA 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 as we've 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 in Gloucestershire across Europe, direct to customers. What we've talked about is setting up a new warehouse in Ireland that will take that on and start doing the shipments directly from Ireland. That's now up and running, as you can see in the picture, and we are now shipping actually already to France, Italy. And we will migrate the remaining European customers that we used to ship to directly from Gloucestershire to this warehouse in Ireland before the end of this calendar year. So things are going as well as can be expected there, clearly still uncertainty on what the outcome of Brexit negotiations will be. Massive thing for all companies and everyone going on this year has been COVID-19. We're very clear with everyone that really our priority -- the #1 priority was making sure of the health and welfare of our employees, families and communities. But we were also 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 the time of making sure that we kept our customers supplied with the critical equipment to them. This has been actually very good for us. We've had very positive feedback, and it's also actually probably helped us in terms of anything gaining business and accounts going forward. Whilst doing that, we also helped out as part of the VentilatorChallengeUK, and 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 both from a technical point of view, on with 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 could travel out and still get to see customers most of the time. We are now more getting out and starting to do actually installations and on-site 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 and throughput and practicality, so how easy it is for people to utilize our technology. And really, with the impact of COVID, that's pushed forward on 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 if we start with industrial metrology. And now we've talked about this. This is really us making sure that metrology is embedded into the manufacturing process. So from a productivity point of view, it's making sure that rather inspecting a product later on, building metrology and then making sure you make the product right the first time. What we see here really is the same trends continuing, COVID has really accentuated that need for automation and removing the number of people that are in these manufacturing sites, something we excel at 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 new 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 automatically on the machine. Now what we are doing here is pushing this technology on a number of enhancements to the NC4 line with the blue -- introduction of the blue laser. What this does is actually by switching from a red laser to blue laser, it allows us to really improve our performance of 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 try and do more things at the same station. So the REVO, we talked about many times in terms of its high productivity with traditional touch measurements. And what we've now added to it 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 program, do area surface measurements. So you complement high-precision touch measurements with the optical fringe measurements to fill in services 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. A 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 the graphic user interface. This is really what is market feedback is saying, actually, the #1 reason often that our probing technology does not get used on the machine is actually the skills or the complexity of implementing the solution. And this makes it very, very easy to do. And we've seen a pull-through there of this. What this does mean, and one of our key metrics is our probe fitment rates. So how many machine tools when they go out are fitted with probes are 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 allows, as you could see in the screenshot on 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 a central system so you can keep track of the process that is going on. This is focused on our machine tool product line, but this objective of making stuff easier to implement is a real key objective for us across our industrial metrology product range going forward. So we expect to see more innovation from us here in the future. Precision measurement, as I've touched on, was the area of the 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, electronics. A number of drivers here and actually many indications of the pandemic with more people at home with more disposable income to spend on technology seems to be generating more investment in this market. What was really key for us, as I mentioned, in manufacturing was actually our vertically integrated in-house manufacturing and our ability to supply very short lead times products to our customers. Again, practicality very much important for this. We focus often on the microns on the nanometers of the performance of our products here. But actually, in terms of new stuff here, we have the ATOM DX. What this does is it takes our smallest readhead, and then we're now putting inside that and interpolator. 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 digital [indiscernible], which can be plugged straight into most controllers. We've also implemented functional safety in a number of our readheads now, 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 these 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 down onto the areas where we feel we have key strengths. And this really means looking at working very collaboratively 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 strength of our RenAM 500Q machine, which is a highly productive, with its 4 lasers, and therefore, it's ideally geared up for all-in manufacturing and reducing the cost per part and making additive manufacturing cost-effective in 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 announced actually for the new tempest target of 30% of the part to be additively manufactured. What we're focusing now on with the new strategy from a design point of view is really on some really 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 was the Virsa. And again, this is actually about practicality of the machine. So we have a fantastic machine with the inVia. It is very much designed for the laboratory. And you can see here an example of a sample on the right of a fresco, which would be just be too large to put in a traditional Raman machine. So what we have is a fiber-coupled machine with the Virsa, and this allows much more flexibility in what is being measured. So that's going very well with a new product for us. We've also done the inVia InSpect system which is very much geared up for our forensic crime investigation. And what it does is have new, better imaging, white light imaging, which you combine -- the white light imaging and the Raman together, which is actually really key for forensic investigation. So with our neurological product line, it really was impacted the pandemic. We did see a reduction in the number of elective surgeries taking place, and that reduced the demand for our consumables. Underlying demand is absolutely still there from neurosurgery, can't be a more important area where you want precision and productivity in terms of patient outcome and in terms of cost of theater. We have a number of installations of the robot during the year, predominantly 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 develop some excellent technology, particularly around our drug delivery new products. And 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 has been a really challenging year for us as a company. It's been a year where we've had to make some really tough decisions on taking the business forward. And I think there's a really good chance, again, to stress how much support and commitment we've had from all of our employees throughout this really tough year. Been really good in terms of our ability to maintain the supply and maintain the 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 when investing in these really innovative and patented products. We have, though, taken these measures, which has really sized -- resized 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 at making sure we're prioritizing that resource, getting it on to the key projects that we think are the most important for bringing in that profit growth in the near future that 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.

Good morning, again, everyone, and thanks to Will and Allen for their presentations. As Will said, we 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. And his question is, "could you discuss regional sales trends, please? Asia appears to improve somewhat in second half of the year, is that largely the semiconductor market or a broader upturn in China? And conversely, are 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.

Thank you much, Chris. Yes, a really good question. As I mentioned earlier, actually, 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 and 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 for the information we do have on where we sell into. 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 nonexposure 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 from our local support for customers there as well. When we look at EU and U.S., in 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 came through quite recently have showed a continual deterioration in machine tool commission. In the U.S., I think, this last month, the data was the first one where it 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 the situation.

Okay. Thanks, Will. And another question, which I think is going to be heading your way is this question from Will Turner. And he asks, "are you seeing a shift from Chinese customers to purchase from domestic suppliers rather than Renishaw?"

Thanks, Chris. Again, another good question. We've always had, for many years now, a competition from Chinese competitors. I would say, if anything, actually, over the last 6 months, that our strategy of what I talked about earlier of making sure we have good stocks in place, a vertically integrated manufacturing, which has held -- allowed us to really hold up our supply chains during the pandemic. And 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, a very much regionally split 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 some really critical health care equipment with our encoder systems.

Okay. Thanks, Will. And another one, I think, is coming your way as well. It's a question from [ Nishat ]. "What are you seeing in the flat panel display market?"

Yes, interesting question. So the big driver for us here really is what are the new technologies coming through in that market and how is that going to drive the need for metrology components embedded into the machines that are going to make it. So one of the most exciting ones here at the moment is micro LED, where there seems to be quite a lot of investment 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 yes, and exciting developments going on there, we will see one in the future.

Okay. Thanks, Will. I think I can give your voice a slight rest now. You have a question, I think, which is heading Allen's way. It's from -- again from Mark Davies Jones. "Could you comment on your expectations for financial income and tax rate in 2021, given the distortions to the 2020 figures at these lines?"

Thank you. Yes, in dealing with the financial income first. The financial income is a combination of the financial income and expenses. And we expect to see perhaps similar to 2019, '20 numbers in the current year. It is primarily arising from currency balances, intragroup trading balances. And we did take mitigated circumstances in the previous year to balance it out. And so we do expect to see some incent to the current year to what was last year. In terms of tax rate, we do expect to see a more normalized rate in previous years for the current year because of the very low statutory profit this year, small changes in the tax charge to give sort of -- to distort the percentages.

Okay. Thanks, Allen. And a question here, again, I believe this is going to Will. It's a question from Sanjay Jha, who asks, "you have referred to increasing focus on the RenAM 500Q, does that imply that additive manufacturing is less suitable for low volume production?"

No, I don't think it does. I think AM has 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 with the 500Q, for the 250 by 250 bed size, we have extremely highly productive and, therefore, low-cost part, which is really critical when you're going in to 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...

Okay. Thanks, Will. A question now from [ John Thorsten ]. John asks, "what is the outlook for total sales volume in the next year, high, lower or the same?" Over to you, Will.

Yes, I think this is a question we'd love to know the answer, too. We clearly have some really stuff that we're excited about for the future. A lot of our business, as I've talked about, is going through this 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 end markets are. So our sales activity is in making sure we gain key accounts and maintain key accounts. But the outcome for us is dependent on that performance, really.

Okay. Thank you. And a question here from [ Siddharth Bhaskar ]. "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 2 years, how many?" So quite a few questions there. And I think that's Will, going to start with that one.

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, electronics, manufacturing equipment, the machine tool builders of making sure that we are monitoring and understanding the 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's positive there very much for our OEM business which is great.

Okay. Thanks, Will. So it's a question now from [ John Thorsten ] again. John says, "with considerable cash balances of GBP 100 million-plus, was it necessary to pass on both 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.

Yes. 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. We're growing this business in the areas that are very closely related to all the 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. I don't know if, Allen, do you want to...

I'll just add about the last recession. 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 or invest in our cash.

Okay. Thanks very much. So we're now moving to a question that's coming in that's coming from [ Anthony Plom ] of Berenberg. Statement -- "the statement notes that the initial results have been published on the clinical study with Herantis Pharma that indicate predictable and accurate placement of Renishaw's drug delivery device, can you expand on the opportunity here, please? What are the next milestones to look out for?" I think, Will, you can take that one.

Yes. I can certainly start with this and others may want to add in. So yes, very pleased on showing the 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. And this is a really important milestone for doing it. And as I talked about earlier, this is where we feel that we need the investment. And also, we need the partners to make this happen.

Yes. 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 scalable.

Okay. Thank you, Will and Sir David. So now is a question for Allen, and it's from [ Joseph Safati ]. "A minor, not so important question to Allen. Why do you need to do 1-month forward contracts to manage currency risks into intercompany balances? Are the risks not being eliminated on consolidation in an economic sense?" So over to Allen for that one.

Yes. The contracts in place to basically mitigate the income statement volatility is the simple answer to that one, Chris.

Okay. Thanks, Allen. So next, another question from [ Anthony Plom ]. "So big reduction in costs throughout the business, particularly in head count, how quickly does this cost return 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.

Yes. So the majority of this is structural stuff that we have put into the business. We have our 2 priorities: one was making sure we were correctly sized for the future, and the other is making sure we're getting better at prioritizing onto the resource onto 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 costs of manufacturing, so which is why, as I talked about, converse at the start, we tend to have our biggest wins in our profit because in that resource, we have to put in to fulfill orders to our OEM customers is very much just from our direct manufacturing resource, it's relatively low. So yes, mostly structural not so much is needed as the markets recover, as they inevitably always do.

Okay. Thanks, Will. We've got 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. There's still a lot stacked up. So now I'm now going to go to a question from Richard Paige. And it's a question regarding the work that we did for VentilatorChallenge: "to what extent did the additional VentilatorChallengeUK work benefit your financial performance in the second half, please?" Who's going to take that one? Allen is going to take that.

Yes, we declared a lot of work on this project, but it was not a particularly significant or material amount in the financial statements.

Okay. Certainly, my understanding, Allen, is that everything was done in cost as well, not for profit or [indiscernible]. Okay. So thank you for that. Now going to move to a question from Jonathan Hurn. I've just got a few questions here, so we'll do our best to navigate through them. "So in your outlook statement, you stated 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. "So additive manufacturing, restructuring, refocus, have you had to reset what you see as the potential revenue opportunity? And will it be slower growth?" And then thirdly, a question regarding furlough, the furlough scheme. "Will the GBP 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 to start on that one, and maybe Allen ends. And so over to you, Will.

Okay. So let's have a look at automotive and aerospace. To start with, they're 2 quite different markets. So automotive tends to be the higher volume market for us. I think we've said that's already, we feel automative has been quite weak for some time to the start of the pandemic, didn't 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 drivetrain technology brings up new measurement challenges there. We feel our Equator product line is really well suited with flexible gauging to a lot of the size of components that are going there. We have some really good opportunities there. Aerospace clearly is the one that has changed, and it's really interesting trying to understand that at the moment. Aerospace is a lower volume, but a higher complexity. So it's great in terms of pushing the technology needs for us for the future. So it's a good driver there. And tends to be a higher value per solution. I think the interesting bit for us is going to be seeing as how does the change going through at the moment allow 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 restructuring and refocusing, so we -- with our tech, we do have a different revenue profile 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 profile 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 space side of the aerospace business is still buoyant.

Okay. And I think the third part of the question, Allen, you're going to answer that. So...

Yes. And with respect to the third part of the question, further costs and will they be repeated in the first half? There will be some benefit in our quarter 1 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 some further expenditure on travel and exhibitions that potentially more than we have in the first half. But however, significantly lower cost base expected in this half versus the last half.

Okay, Allen. Thanks very much. We still a lot of questions to get through. So I'm going to give the opportunity now for a question from [ Jing Lu ]. "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 have seen in some of the automation hardware space? Second question on additive 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 group sales?" So a couple of quite a lot of questions there. And so, Will, I take that you'll probably deal with the first one. So over to you.

Yes. So relative to local Chinese competition, we still feel we have some really key differentiators. And if you just take products like our encoder product line, which we sell into many different electronics, semiconductor customers. Actually, it's 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 in metrology but also extreme reliability. And if you imagine the importance of that on a GBP 0.5 million piece of equipment with the encoder that what we can show to them in terms of our manufacturing and build quality is absolutely essential for them. And the same goes with our machine tool product line and CMM product line. So in terms of AM, and I think we have some other questions on this. So other -- clearly, there is a broad range of different industries, which all have volume applications or additive, which we've talked a bit about in the past. I just want to know if we're growing again, just a theme from earlier, is the electronic side have actually just because of the size of that industry these days that there are interesting applications there, which actually that the volume of stuff you end up doing with electronics just because the size of the market compared to something like aerospace can be huge.

Okay. Will, thanks for that. And I think that answers -- well, I think it probably makes sense to go to questions from Milena Mileva. The question here is, "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? And what specific innovations are key parts of the road map?" And I guess, Will, you'll probably start with that one?

I suggest if I start, and I can imagine that David will want to add a few bits on this at the end. So if we look at it, so what are 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 a part like you always used to, but actually designing something to be -- get the benefits of what can be done from additive manufacturing. So I think that part of the message, the people are understanding that. It's taken a long time to come through as manufacturing industry often does, but there is a real understanding now of people experienced with additive manufacturing, wanting to push this forward. The barrier then is the performance advantage you get versus 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 come back to is on precision and actually the innovations that we'll be looking at that we won't be able to talk about at the moment. But in terms of 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.

And the next-generation machines, Will certainly addressed what's the problem at the moment, is the cost per part is very high, and that means that there's very -- relatively very few parts where it has -- where you sow an economic gain to use. But the next-generation will address the price per part, but also the precision of the part and the total reliability and automation of the total system, but that is next generation.

Okay. Thanks, Sir David. Well, we'll stay with 3D printing or additive manufacturing. Another question from [ Anthony Plom ]. "Has your opinion of 3D printing change following COVID-19? Should customers look to near source production and derisk the supply chains?" Will, you want to start with that one?

Yes, sure I'll take that one. Really good question. I think it's actually broader than 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 chain 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 the bits that we see as a real positive for us in terms of if there is re-onshoring of manufacturing. A, it's 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 talked about.

Okay. Thanks, Will. I'll take a question now from Sanjay Jha again. "Is CapEx expected to fall further in 2021?" And I'll put this one over to Allen.

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

Okay. Thanks, Allen. And another -- where are we? So a question from Robert Davies again. "So given the recent improvement in China machine tool data, what are the key drivers behind your relatively conservative outlook?"

So we're certainly making sure that we have a conservative view of things and looking at making sure that we are budgeting according to a high degree of uncertainty, which I don't think anyone can argue 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, destocking policy to make sure we can do that, which we talked about is critical early on. So I think coming out these things, we'd much rather be cautious and give ourselves the flexibility there.

Okay. We move now to a question from [ Kathleen McMillan ]. "Could you please provide more detail on the ambitions for the newly created Renishaw Neuro Solutions?" Who is going to take that? Will, you want to start with that one?

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 rest of Renishaw to allow it to have its own -- very much its own division. The new setup also allows us to really take what we view as a very exciting technology. And it's relatively early stages still here of the regulatory process. It's 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 on the technology, we feel. And probably, we need some -- we may benefit with some partnering of others. We have experience in the health care field.

Okay. Thanks, Will. A question here from [ John Roch ]. "I would like to ask about management's attitude to acquisitions and M&A, if this has not already been covered." We'd like Will to start with that.

So look, clearly, 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 profitable growth for the long term. Now that's not really something that if something came that was well suited to areas of our market that are very close to what we do and is a profitable business, then we would certainly always consider, but it is not a key part of our strategy going forward.

Okay. Thanks, Will. And I have a question from Robert Davies. "Outside of 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?

Yes. So I mean the interesting bit here, we probably can't talk about, so the interesting stuff we've got going on in terms of R&D are things that we want to keep very quiet on there. And actually, in general, we are keeping quiet around our innovations 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 this stuff is confidential with the people that we work with on what their metrology challenges are. But clearly, this industry is going through a massive challenge in terms of working out, okay, how do they design now with the vehicles? What tends to come through a little bit later is them having designed that, working out the tolerances that are needed and what are the things that they can and cannot measure. 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 REVO suits are quite well as well. From an aerospace, as I mentioned, aerospace is always challenging. Really here, it's 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 real advantages there as well. So yes, exciting times but not stuff we can talk about at the moment.

Okay. Thanks, Will. I think that also covers off Milena's question regarding the areas of EV that we're working in. And as Will has already said, there's a confidentiality there. So we can't comment further. A question here from Mark Davies Jones. And I think we're really towards the end of the questions. Now I think most everything else has been covered off in answers already. So this could well be the last question. "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 on short-term measures and government support schemes?" And I'll put that one towards Allen.

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

Okay. Well, 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 will aim to publish a recording of today's presentation and Q&A session on the Investor Relations section of our website by tomorrow morning. So on behalf of Renishaw, I'd just like to thank you all for attending today's event. And hopefully, it's been of value to all of you that have done so. And finally, just a reminder that you can download the 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.