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, and I would like to welcome you to this live webcast presentation of Renishaw's preliminary financial results for the year ended June 2022. Before we start today's event, I would like to read a short statement on behalf of the company. We are deeply saddened by the passing of Her Majesty the Queen, and we would like to offer our condolences to her family and friends at this very difficult time. She was a remarkable woman, whose hard work, dedication, compassion and integrity over more than 70 years of service shone through and gained a huge respect around the world. Rest in peace, Your Majesty. Today's presenters are Will Lee, Chief Executive; and Allen Roberts, Group Finance Director. Before I hand over to Will, I'd like to go through some basic housekeeping for the event. After the presentation, which will last around 25 minutes, so David McMurtry, Executive Chairman, will join Will and Allen for a question-and-answer session in which we'll try to answer as many questions as possible before we close at 11:00. No questions will be answered during the formal presentation. [Operator Instructions]. I should also point out that all financial information given during this presentation will be in pound sterling. Thank you again for joining this webcast event, and I will now hand over to Will.

Thanks, Chris. So let's, like, start looking at the financial summary of last year. So good news all around here, lots of record. Revenue up 19%, adjusted profitable tax up 37%, end of period cash up by 18%. Start with if we have a look at the revenue, then very much a similar story to hear for the underlying drivers as to what we talked about at the half year. Semiconductor electronics remaining strong, and the other markets really starting to catch up throughout the year. We also saw across the regions a strong growth, so it's nice to see all the different regions are continuing to grow, as they have been. Most pleasing was the ability of our manufacturing and our design teams to overcome the challenges that we experienced, particularly with the well-publicized supply chain challenges around the electronics industry. We did see a number of challenges. In all the occasions we've managed to keep production going by engineering change, designing an alternative components. A great effort there by the team. What we have seen is delivery times increased throughout the year, but we have now actually get in a place where these delivery times are coming down and are really allowing us to explore the opportunities that are out there in the market. I think just to summarize and finalize on this, that the most pleasing thing about the revenue growth we've seen here is really, we start to -- and I see all the benefit of the hard work of the new accounts that we have gained, the full impact of them coming through as the markets have improved. So a really positive set of results, reflecting all the hard work that's gone on across the group. So if we next take a look at the group profitability, our record profits of GBP 163.7 million, then probably really important here is to have a look at some of the well-publicized inflationary pressures that everyone is feeling and the impact that they have had on us. You can see some of the details in the bottom right here. If we look from a positive point of view that, yes, we have seen rising input costs into manufacturing. But actually, if you look at the productivity measures that we have put in place, these have very much offset those increases. We had, as we talked about last time we gave an update, seen increasing salary costs, both from a rising headcount as we invest more for the future and also pay benchmarking. So that has come in across the board as increased salary costs for the year. We've also seen some impacts from some of the geopolitical uncertainty that's going on, and we did immediately stop shipments to our office in Russia, and we have now actually closed our offices in Moscow and in Perm. Some provisions were placed in for these changes, and Allen will go through this in more detail in his financial review later. We look at our manufacturing technologies business in a little bit more detail, and actually, it's a very similar message again to the half year, similar breakdown as to where we're selling. Still, we saw the really strong markets for semicon, for electronics, CapEx investment, driving the demand for our encoder products. flexible gauging machine tool products really with that need for automotive, more productive machining, still strong demand. And also the strategy of serving the high-value solutions, very much to targeted key accounts getting in repeat business. That's for additive. And our REVO 5-axis system really starting to work well, with repeat business coming through. And I'll talk about where that's going later on in the presentation. So we see here long-term growth drivers, really positive from the stuff that we've talked about with new technologies coming through like Additive Manufacturing, Robotics, Semiconductor. These are all positive growth markets and key technologies to empower the future. If we now take a look at the Analytical Instruments and Medical Devices sector then again, really, the message here is very similar to the one that we gave at the last update. End markets, similar. One update to start with on Spectroscopy though, the challenge we raised about some of the duty-free exemptions, certificates, that's now eased. So we did see a good second half for Spectroscopy. We did, however, as we were highlighting, see some more challenges with the Neuro business from the drug delivery side. So the trial that we had that was really improving the profitability of the group, that stopped. No issue with the device. There was a drug issue, which meant that trial stopped. We do have a number of these opportunities in the pipeline, and we are really looking forward to getting some of these more trials coming through and the profitability, therefore, of that group improving. Okay. I will now hand over to Allen.

Thank you, Will, and good morning, everybody. As Will has already stated, we have delivered a very strong performance this year, resulting in record revenue and record adjusted profit before tax. Meeting this strong demand has been a real challenge given the global supply chain pressures we've seen, and I would like to thank our people for their continued dedication to meeting our customers' needs. Revenue amounted to GBP 671.1 million compared to GBP 565.6 million last year, an increase of 19% or 18% at constant exchange rates. Adjusted profit before tax is GBP 163.7 million, 37% up from GBP 119.7 million last year. This is mainly as a result of additional gross margin from revenue growth. However, we have seen an impact on our costs from inflationary pressures, particularly labor and utilities, and there's more on this later. This gives a return on revenue of 24% compared to 20% -- 21% for the previous year. Adjusted profit before tax is one of the key performance measures used by the Board to monitor the underlying trading performance of the group, and the following items are excluded from adjusted profit before tax. Losses of GBP 8.3 million from forward contracts, mostly U.S. dollar-denominated, which are deemed ineffective for cash flow hedging compared with gains of GBP 22.9 million in the previous year. The movement has been caused mainly by the weakening of sterling against the dollar. These gains and losses have had no impact on our cash balances, and no additional contracts are being designated as ineffective this year. And GBP 11.7 million past service costs relating to the U.K. defined benefit pension scheme, and more on this shortly. And a credit of GBP 1.9 million for the third-party advisory fees relating to the former sale process and the release of provisions for restructuring made in our financial year 2020. The results and statutory profit before tax was GBP 145.6 million compared to GBP 139.4 million last year. The effective tax rate for the year is 17.3% compared to 20.1% in the previous year. This reduced rate mainly rises from the impact of the profit split by country and different tax rates in those countries, an increase in the patent box and CapEx super detection incentives in the U.K., and an increase in the profits from associates and joint ventures, which are reported net of tax within the profit before tax. Earnings per share on an adjusted basis is 185.5p, an increase of 41% compared with last year, and on a statutory basis is 165.4p, up from 153.2p last year. In line with our progressive dividend policy, the Board has proposed a final dividend of 56.6p per share, giving a total dividend for the year of 72.6p per share, a 10% increase over last year. Returning to pensions. The company and trustees have successfully implemented a number of changes to the U.K. defined benefit pension scheme during the year. Following the Queen's Council opinion received last year, mainly relating to how revaluation and late retirement factors are applied, the liabilities of the scheme reduced by GBP 14.3 million last year with a credit reported in the other comprehensive income and expense. This year, the scheme rules have been changed to align with the historic administrative method for calculating the revaluations and early retirement factors. The result in increase in liabilities totaling GBP 11.7 million has been recognized as a past service cost in the consolidated income statement. This cost has been excluded from the adjusted profit before tax. We also agreed that the company will have the unconditional right to a refund of any surplus unwind up of the scheme aligned for the recognition of GBP 40 million IAS 19 scheme surplus this year. Following the agreement of the September 21 actuarial evaluation, the GBP 10.6 million held in escrow as security has now been released from charge. In addition, the net book value of U.K. properties subject to charge has reduced from GBP 81.7 million last year to GBP 54.2 million this year. This slide presents details of our income statement, and the profit bridge shows the movements that reconcile the adjusted profit before tax of GBP 119.7 million from last year to the GBP 163.7 million this year. We have seen a GBP 66 million improvement in gross margin, excluding the engineering costs, which is attributable to the increase in revenue. Our gross margin of 35% of revenue is in line with the previous year. However, we have seen an increase in the cost of a number of purchased items, particularly electronic components, aluminum and steel, and an adverse currency impact. These have been offset by improved efficiencies resulting from higher production volumes and process improvements. The group headcount has increased to 5,097 at the end of June '22 compared with 4,664 at the end of June '21. The increase mostly comprises manufacturing staff to ensure we have sufficient capacity to meet demand and also an intake of 145 graduates and apprentices, continuing our investment in future talent. Labor costs, including bonus provisions were GBP 254.4 million, an increase of 14% versus last year. This has been driven by an average headcount increase of 11% plus salary review and performance-related bonus increases. We remain committed to our long-term strategy of developing new, innovative and patented products to create strong market positions, with net engineering cost of GBP 78.6 million compared to GBP 72.1 million last year. Gross engineering expenditure increased by 12% to GBP 85.8 million. This total expenditure was consistent with our plans, but we spent more than originally planned on existing product support, with the need to redesign a number of existing products to maintain supply to our customers. As a result, our GBP 59.4 million expenditure on new products was similar to last year. We have also experienced an increase in other overhead costs, including higher utility costs due to rising energy prices and higher usage, and other third-party administrative cost rises due to current inflationary pressures. Distribution costs have increased by GBP 12.4 million this year, including GBP 2.1 million of impairments following the cessation of our operations in Russia, an increase in travel and exhibitions as some restrictions relating to the pandemic have been lifted, adverse currency impacts, particularly from the weakening of sterling against the dollar and increased labor costs following pay reviews and performance-related bonuses. Within administrative costs, we incurred GBP 3.7 million last year nil of expenditure on services relating to the implementation of a group-wide ERP software package. In the previous year, administrative costs included GBP 4.7 million of impairments relating to an associate company, which have not been repeated this year. Profits from associates and joint ventures has increased by GBP 2.7 million, primarily due to strong demand for the magnetic encode that's designed and manufactured by our RLS based in Slovenia. Looking forward, as a result of benchmarking other pay reviews already completed and excluding the other factors such as headcount growth, we expect annual labor cost to increase by around GBP 19 million in 2023 compared to -- with this year. Where possible, we are mitigating cost inflation by increasing the sale price of our products and are focused on delivering productivity improvements across the business. Moving on to capital expenditure. Of the GBP 30.8 million expenditure in the year, GBP 25.1 million related to plant and equipment, primarily to support our manufacturing processes and IT infrastructure, and GBP 3.7 million on property for the completion of our new distribution facility in South Korea, providing demonstration capability for our products, in particular, capital goods products. Looking forward, we have commenced the expansion of our production facilities at the Miskin site in South Wales to support future business growth. The committed spend is around GBP 64 million, of which over GBP 30 million is likely to be incurred in the financial year 2023. On this slide, you will see the latest progress on the development of the site. We're also planning significant investment in production equipment to increase both capacity and productivity, with a focus on automation, and further investment in our IT systems and group-wide ERP systems. Turning to cash flow. This bridge tracks the movements from our opening cash and bank deposits balance of GBP 215 million at the first of July to the closing position of GBP 253 million at the 30th of June. Our operating profit before non-cash items and research and development costs gave a cash inflow of GBP 254 million. We have seen a net GBP 48.8 million cash outflow from changes in working capital, primarily relating to an increase in inventory levels of GBP 48.9 million. This reflects increases in global demand and planned uplifts to strategic safety stock levels to mitigate global supply shortages. Significant cash outflows relating to our capital allocation strategy include GBP 59.4 million of R&D costs, GBP 31 million of CapEx, including intangibles, and GBP 49.5 million of dividends paid. Other significant cash outflows include GBP 23.4 million of tax payments and GBP 8.9 million of pension scheme funding. Our strong cash position leaves us well placed to invest in the infrastructure needed to meet our future growth plans. I'll now hand back to Will.

Thanks, Allen. So next, let's take a look at the progress we made on delivering our strategy. So look, across the board, whether it's manufacturing technologies or analytical instruments, three key things that we've always talked about, our product innovation, global support and manufacturing remain absolutely key for us. What I'm going to go into a bit more detail, starting with manufacturing technologies, though, is how we're using those to really grow by looking at the 2 routes to market, where we sell components to machine builders. And secondly when we sell complete solutions to end users. And we're also going to touch a little bit on how we're both continuing to grow those existing markets by innovating within the next generation of products coming through and how we are also innovating to allow us to expand, to go into close adjacent markets and accelerate our growth. So first, let's have a look at our focus on machine builders. So by machine builders, we're actually having quite a wide range of different companies. We have here people making machine tools for cutting metal, and we also have companies making, for example, semiconductor manufacturing machines to go into the semiconductor manufacturing industry. Now here, we've got long, good relationships with these customers, so this allows when we bring new innovations through. Like the RMI-QE radio transmission system that we talked about a year ago, we can really allow our customers to push the game on, secure those accounts with this next generation of technology. It also means in areas where actually we've got markets to grow into, like with our laser tool setter. When we come up with a really innovative disruptive product like the NC4+ Blue, we can start to take market share and grow our place in that market. Since launching now, actually, our sales team have done a really good job working with global accounts, and that's really starting to grow our market share there. One particular -- a German company called Walter makes high-end grinding machines, and they have recently chosen and selected us as the laser tool setter for their machines going forward. So very positive news for us in terms of us outperforming the market. Now, more from the semiconductor side. A wide range of optical encoders are used across the board here for position feedback in these machines. And here, a combination of the innovation in the product and long-term account management really is allowing us to grow here. And again, very confident that we're growing market share with new accounts coming through all of the time here, and this is really helping us on this wave of semiconductor investment really outperforming the market as well. Now, we also have the exciting programs here for the future, both on the new major products to come through in the shorter term and also on the disruptive technology for the longer term, too. We've also talked in the past about diversification within our manufacturing technology sector. So what we mean here is really introducing new non-substitutional products into very close adjacent market segments. A couple of examples here that we talked about that are really going well. First of all, FORTiS, the enclosed encoder designed for these harsh environments, where we're selling and promoting to machine tool builders predominantly. So what we're seeing is the product innovation we talked about has been really well-received, particularly actually the simplification and the ease of installation. What we are seeing, and you can see the names of some of our customers for FORTiS in the top right, is that we are displacing incumbent suppliers, and people like us for both the product innovation and our known and trusted support that we can give them globally. Really challenge actually here is ramping up the manufacturing capacity to cope with the demand that has been higher than we expected. Also from our associate company, RLS, we have a new magnetic rotary encoder, SpinCo, which is designed again to be sold into these machine tool builders. So a real advantage for this. It means with our existing sales force, we can really increase the revenue from each machine tool that is sold. Now separately, but aligned from a machine verification point of view, where we're a world leader in machine calibration and verification, we've also launched the XK10 alignment laser system. Now whereas typically the calibration side is used at the end of the manufacturing process, this allows some of the fundamental setup to be done at the start of the machine building process. So again, a complementary product to areas we already are. So positive feedback here on the products that we've talked to you about that we had launched. We also have a nice positive road map of products and technology here for ideas on new products, along with this idea of diversifying into close adjacent markets. So staying with manufacturing technology, let's have a look at what we're doing with end users direct. Now clearly, we sell all our products also direct to end users, but there's a couple of really interesting areas that we wanted to focus on. First, REVO 5-axis system going very well. Combination of things here, of the productivity advantages, of the speed of REVO they can give, and also the additional measurement capability that some of the newer sensors that we've launched are really giving to our customers. Really wide adoption across a large different range of customers, Ford, GM, Pratt & Whitney, GE, all key customers for this technology. EV. You can see on the right, a picture of actually -- because it's a very flexible system. So traditionally, a REVO is very good at measuring internal combustion engine parts, also very flexible and good for measuring EV parts as well. See, EV is quite interesting because we always talk about the metrology challenges that there are with EV and how we solve those, but EV is pulling through business for us in many different areas. So interest in batteries recently, with our encoders being designed into machines for battery manufacturer. And also our RenAM equipment is being used for analysis of parts within the battery. So a good, strong driver for us there going forward. Now secondly, in terms of going back to the end user on manufacturing tech, additive manufacturing here. We've talked about this as saying we had a strategic change a few years ago. We're focusing on what we felt were really key accounts with potential for multiple system sales. And this, I think, from the success that we've had and are having with accounts, was the right call to make. And we are now seeing that benefit of repeat business coming in from some of these. One that we talk about, Dentistry of BEGO ordering more machines from us, a very large successful dental company. So next, let's have a look at our analytical instruments. Medical Devices segment. So first of all, with spectroscopy. The message we've been talking about is like how do we grow this into slightly newer markets and develop that opportunity for repeat business? The Virsa instruments we've launched, to start with, has really helped with that, and enables us to try and move out just the research environment with our more flexible machines, so that is going well. We've also launched a new product, the inLux. So this is the product you can see in the picture on the right here. This is designed to be integrated with scanning electron microscopes. So it allows you, if you're using a scanning electron microscope, to get the benefit also of Raman analysis on the sample that you're looking at. This allows two new route to markets to open up for us, both selling direct to end customers who already have an SEM and also through our collaboration with the SEM builders, often being sold as a solution as new. And then secondly, from a neurological side, I touched on this earlier, the absolutely key bit for us here is getting the accounts in and getting the trials going with the drug companies. That is key for the success of this business. Clearly, implementing our strategy, it's really important that we do this in a sustainable way, and we've touched on this before. We've got agreed targets in place now for Scope 1, 2 by 2028 and for all Scopes by 2050 at the latest. We're continuing to invest by switching over to renewable sources where we can and also in self-generation of solar panels. Insulation, changes in heating systems to make sure that we are accelerating towards that 2028 target. When we're looking at the Scope 3, one of the important things is us understanding the benefit that our product gives. Whether that's reducing the way through novel AM adoption, or in terms of the efficiency by making more accurate parts for engines, then we really feel the stuff that we are doing, the products that we're making and how we are helping our customers really allows the world to develop for this Net 0 future. So if you take a look at our people, then I think you can see from everything that we've achieved this year, the effort that our staff has put in has been absolutely fantastic. Also, I think it's important to stress that when we're looking at our business going forward, our primary growth strategy is one of organic growth. And this is because we feel we are operating in some really attractive markets and we have the technology pipeline to really exploit these. We also have a pretty good track record of making a success of this through disruptive innovation. This holds to both those existing markets that we talked about and those close adjacent market opportunities that we want to also exploit. To do this, we've got to make sure we have the people to do this, and we've got to make sure we're making the most out of those people. We've been putting in initiatives across the group, both designed to really help people develop and succeed and also to minimize our churn. Now, this includes staff development, but it also concludes the financial benchmarking and slides that we went through that is going to cost us more money, the additional GBP 19 million that Allen mentioned earlier. We also plan to continue targeted recruitment. Our graduates and apprentices, who are early careers, are the lifeblood of the future of the organization and are our primary recruitment exercise throughout the year. We'll also be doing targeted recruitment of key skills that we need that are vital for delivering of our plan. Okay. So if we now take a look at the business environment and the outlook going forward. And I guess to start with from a positive point of view, look, we have a really high order book at the moment. Our order intake is still strong. If it has eased a little bit from where it was, the order intake that is from earlier on in the year. We also report analysts predicting more uncertainty in all the markets, particularly the semiconductor and the electronics CapEx, and we'll have to see what happens there going forward in the medium term. What we do benefit for here, though, is that some of the markets we're exposed to. We've talked about ULEV stuff earlier, some of the defense stuff from geopolitical, feel like they are still strongly being invested into. Now, some of the challenges we've faced last year, feel like they're easing, particularly from a supply chain point of view. They are still a challenge though. But hopefully, they gradually get better throughout the year. Certainly, as I mentioned, in terms of product lead time, things have improved an awful lot for us in order to making sure we make the most of the opportunities that we have in the market. Now in this world of inflation that we're moving into, clearly, for us, productivity is key in making the most of the resources that we have. We do or we are likely to see some increase in things like material prices, which I said so far, we've offset a lot of with our about productivity enhancements and some benefits that we see from where we've locked in costs on contracts such as energy going forward. So we talked about price rises back at the last update. They have been implemented by our sales regions. Bit of phasing here, working through some of order books and previous orders, but we're expecting a couple percent of additional revenue from these targeted price increases, and we will be reviewing this as we go through the year to see what additional measures we can take. So let's summarize. Overall, as always, long-term growth opportunities, right, with the markets we're in, with the innovation that we've got coming through. We feel very confident with our strategy and also the actions that we're taking to deliver a really sustainable long-term growth for initial. So I'm going to hand over now to Chris, who is going to host our Q&A session.

Okay. Well, thank you, Will and Allen. We've now been joined by Sir David. So good morning to you, David. We have around half an hour or so remaining. And throughout, as usual, I'll try to group similar questions together, so we may not be able to answer all individual questions. [Operator Instructions] So we're going to start with a question that's come in. If revenue is up 6%, I believe that's comparing H2 with H1. Why were distribution costs up 19%? Seems out of line. I think that's going to go to Allen.

Thank you, Chris. Yes, this is where we're looking at. The revenue for the first half of the year compared to the second half, where revenue did increase from GBP 325 million to GBP 345 million, which was a 6% increase, and distribution costs increased by 19%. There's a number of reported elements in that 19%, particularly the write-off of our Russian impairment and the closure of Russia, that was about GBP 2.6 million. We have seen more trouble being undertaken this year post-pandemic. There was also an impairment of some property in Michigan for our vectoring business, which is relocating. There's an element of currency impact as well and some increase in headcount. In summary, they all add up to around about 19% increase.

Okay. Thanks, Allen. And a question here relating to cash. So net cash on the balance sheet is at a record high. Could we give -- or could -- yes, we give some of that cash, or could some of that cash be returned in a special dividend or a share buyback? And I think, Will, you're going to take that one?

Okay. Yes. So look, we've been really positive seeing how the business has generated significant cash recently. We have been discussing this as a Board. Clearly, we want to make sure that we have the cash there to support our aggressive growth plans and also contingency, that if there are harder economic times ahead. We've been looking at setting the limits, and then we would be discussing over the next half what things we can do with cash that's in excess of the target that we need. So Allen, you want to talk any more about CapEx plans? You've gone through already some of those.

Okay. Yes. We've got some pretty extensive capital expenditure plans this year. As I mentioned in the commentary, we've committed to around about GBP 30 million expenditure on Miskin over the current year. But that's part of a big -- much bigger total of between GBP 60 million and GBP 70 million for construction. We're almost doubling the size of our Miskin plant. This is the biggest ever CapEx program we've undertaken. So -- but we're looking to complete Halls 3 and 4 by the end of December next year. In addition to that, we've got some -- we're building a new office block down in Brazil, and we're doing some refurbishment in the Netherlands. Additionally, we've got some very extensive plant and machinery expenditure, not just for volume but also for further automation of processes. Although not quite capital, but we're putting a significant investment into our ERP programs with the first deployment of our D365 taking place this year. And this is likely to be slightly less than the GBP 3.7 million that we spent last year.

Okay. Thanks, Allen. There's another question here relating to cash. Given increases in bank base rates with more to come, is the company expecting to generate significant increases in interest income in the coming year? And I'm going to give that one back to Allen.

Very simple answer to this one, and the answer is yes. We are expecting to see an extra GBP 2 million, GBP 3 million, GBP 4 million additional interest income this current year.

Okay. Thanks very much, Allen. A question here on ownership. In the Chairman's section of the release, David states that he and John Deere remain committed to Renishaw. Does that mean you've now completely finished exploring all options? And I think, Will, you'll take that one?

No, it certainly doesn't. This is something that we are having -- discussing frequently as a board as to what options there are and how we can work together to find the best solution here for all stakeholders as we have been doing. So those discussions continue, and I see there's a few other questions on here. There's not really much more we could add on that position today.

Okay. Thanks, Will. Question here regarding market share, and I think it's going to go to you as well, Will. Can you remind us, please, what your market share is in each product area?

Yes. So we don't talk about exact market shares. We did go through Investor Day and show that in our established businesses, our traditional businesses, we are very much #1 or #2 in everything that we do. And for new areas, we have to have a plan as to how we're going to get there, such as additive manufacturing for the future. And actually, a couple of businesses where we didn't think we had the opportunity to do that. Then a few years ago, we divested. So yes, that's it at the moment.

Okay. Thanks, Will. A question on additive manufacturing here. Can you talk about what rate of growth you're seeing within the additive manufacturing business? Has there been a notable step-up versus fiscal FY '21? Guessing Will, you're going to take that.

Yes. The change here has been more actually the migration of the strategy that we talked about, of the focus on key accounts with the opportunity for repeat business. And that's been a really pleasing thing to see last financial year, and that's what we expect to see accelerating through this year. Just been out visiting a U.S. team at the large IMTS trade show over in Chicago, and you can see we're now starting to really get the repeat business coming through from a number of customers over there as we are also in our Europe region. So I think a real positive outlook there for this financial year.

Okay. Thanks. Sounds very good. Okay, some questions now on China. Are your facilities there back at full levels of operation? And if global OEMs shift incremental production investment to other markets such as India and Vietnam, how well are you set up to support that?

Okay. Yes. So last time we spoke, we had all those challenges over in China. Really pleased to say we are back up at full levels over in China now. There's occasionally smaller lockdowns regionally, but we're well placed to support and get product and support customers. So yes. And also a good point here with production, which we are seeing, moves of certain people to countries such as India and Vietnam. In India, we have long been established in and have really good coverage. Vietnam, over the last 10 years of construct, we've been steadily growing our capabilities there as it started to show signs of becoming more and more with the manufacturing there. Yes, so we are well placed in Vietnam to make sure we can support our customers.

Okay. Thanks, Will. It's a question now on semicon. Can you be more specific about the level of weakness in order intake from semicon electronics sector so far in FY '23? And has it been across all product groups who supply these end markets? And I'll pass that one to Will.

Yes. So when we talk about this weakness, predominantly, we are talking about where we supply our different range of encoders into semicon electronics CapEx, so it's very much focused on the encoder market here. The -- as said, there has been a weakness. Not huge, but it's certainly, the order intake has been reducing. We think bit of probably overstocking that is going on, but a bit more uncertainty also with those capital equipment manufacturers. Talk is of recovery because clearly, the long-term demand drivers are very much still there. And the information we seem to get at the moment suggests that this is just a phasing issue, and things will pick up actually in the shorter term, but we will see.

Okay. Thanks, Will. And actually, this question is relating to semicon as well. Do you still have significant backlog of semicon and electronics orders to support revenues in this area over the coming months, or will weaker input have a fairly immediate impact on sales trends here? I'll give that one to you.

Yes. So we -- as a group, we still got a really strong order book, 2.5, 3 months or so at the moment. So we -- yes, we have that, and there's a significant amount there, which has to do with some of the electronics. So yes, we've got some good coverage. And still, as I spoke about before, we are getting better visibility from these customers than we used to. And more dialogue, as I think they've realized how important it is to have -- give the supply chain more clarity to make sure we have the ability to make sure we can supply to them.

Okay. Thanks. Slightly different question here. Why do you think the share price is so low given the stellar performance? Will, do you want to take that one?

Yes, I'll get that. So, we're really pleased with the performance of the group. Where the share price is, harder for us to speculate. I guess you can look at the other companies with long-term growth plans, seem to have been more hit. Believe that's for the analysts to judge. All I can really comment on here is we're very positive on the performance this year, and we're extremely excited with the opportunities that we've got going forward. Particularly I think the innovation, the new products coming through and the ability to outperform the market growth rates, which are nice as well. So who knows?

Okay. Thank you. Question here relating to our 2 core sectors. Can you remind us of any synergies between the core manufacturing technology division and the spectroscopy business, in particular? I think Will will take that one.

So spectroscopy is quite a different business from the manufacturing technology area of our business. Because of that we have been increasingly separating it and running it as a stand-alone business. So it still benefits from some of the group functions and the support from our overseas sales operations, but in general, we run it far more separately. It does -- some of the trends and some of the information coming through, I've talked earlier in the presentation about, actually, battery. So we will be selling into the same companies and gaining market information and needs and sharing them. But in general, it's run very much as a separate part of the business. As is neuro, which is now being split off into a separate company even.

Okay. Thanks, Will. A question now on currency. This one is going to go to Allen. With significant movement on the U.S. dollar even since your year-end, what impact is this having on Renishaw, including forward contract coverage?

Thank you, Chris. Yes, we've got a hedging strategy in place whereby we cover approximately 75% of our forecast cash inflows. And what we've experienced last year that the average cash, the average rate -- in particular our dollar, we cover U.S. dollar, euros and yen, our principal currencies where we have hedging strategies in place though the significant one being U.S. dollar. Last year, we saw an average forward rate of around about 1.42. And for the current year, we're looking at an average rate of around about 1.32, so we should see some sort of benefit for that. We have a currency hedging strategy going forward for 2 years, and so -- and we have set caps at which we will undertake contracts. So I think potentially year-on-year, we should see a benefit. But we're based on current exchange rates. We don't know where they're going to be going over the next 6, 9 months.

Okay, Allen, thank you. Just a question here on strategy. You have stated you are focused on organic development. Do you think that risks missing inorganic opportunities that could accelerate your time to market versus internal development? There are laser technology peers for component inspection on much cheaper valuations at this point in the cycle, cash is also at an all-time high. Is this good capital allocation? Will, do you want to start with that one?

Okay. So good question. So we're looking at this, and we're always evaluating to see are there some small companies developing some new technology that we think we could really benefit and utilize our route to market on that is complementary. So we are reviewing this. As you can see, nothing at the moment that we have done. Up [indiscernible] growth is the excellent R&D that we've got going on across the group, and that will be fueling the majority of our growth areas that we think maybe we are weak from internal review. We will see if there's someone that we think brings something really quite disruptive from that side, but that will probably be the only reason that we will look at acquisition.

Okay. Thanks, Will. There's a question on labor costs, I think this is one going to Allen. You speak about GBP 19 million of additional labor costs expected in FY '23 year-on-year. Can I ask the extent to which these increased costs were already being incurred in Q4 of the year just completed?

Thanks, Chris. Yes, actually, this is an incremental cost versus last year and as a result of our July '22 our new pay review, and so that is an absolute amount based upon that review. And additionally to that, we are recruiting, continuing to recruit. But we're not sure at this time what the cost of that incremental headcount increase will be.

Okay. Thanks, Allen. One, I think Will -- for Will. So the Capital Markets Day, Investor Day, you talked about visibility on the order book having increased and never been higher. Has this reduced again?

So yes, the order book has reduced. It's still really healthy, as I mentioned, I think earlier on in the Q&A about 2.5, 3 months. So we're still -- still got visibility on the book. We are -- got the advantage of our run rate of getting -- so manufacturing and getting products out is increased, so that's really good. And we have seen that slight sort of easing off in the semicon, so our encoder product line order intake, which is predominantly sort of an APAC region issue for us at the moment.

Okay. Thanks, Will. I'll just randomly direct questions that will just keep you on your toes. Okay. Some more questions on China. I think some of these have already been answered, but are you seeing any changes in the competitive dynamics? Is there anywhere you are gaining or losing market share most? Sterling has depreciated a lot, for example, 15% versus the U.S. dollar year-to-date. Most of your costs are in sterling. Can you confirm that you have shorter FX hedges now? Do you have any estimates of the benefits you'll get from this? So first question, I guess, on China to you, Will, and then we have currency question, which we'll put to Allen. So we'll start with Will.

I think I actually said this, too. In China, we talked about, it's fully up and running and demand is strong. The concern that there being order intake on semicon, where there's manufacturing done there. In terms of competitive dynamics, gaming and losing market share. So I said that this is really important for us, and we do monitor as well as we can. Most promising, I think, is some of the newer products that we have launched where we have going to areas where we're not already there, like FORTiS. enclosed encoders, clearly, a lot of market share to take. And that actually, I think, of all the products that we've launched that I can remember which are designed into other people's equipment to be sold on, that is having the fastest uptake rate and the biggest impact that I can ever remember. So that is, by far, the most positive at the moment. We're also there with other -- our open encoders, really doing well in terms of gaining accounts. It's often long-term relationship building. As I said, what we can see now is as this market has done well, really, the full impact of those coming through over the last couple of years. In terms of losing market share, nothing significant. We have had areas where when demand was very strong, then there's probably a couple of accounts which ended up getting shared where we would love to have had more of the business, but we were up against it in terms of supply. But long term, positive and very much a sales organization focused on making most of those opportunities. So I think second half here is over to Allen.

Yes, thanks. I think I covered this in a previous answer to a question, just to confirm that our foreign exchange hedge is now down to 2 years. We used to have about a 3.5-year coverage. But the last couple of years, we've been -- we have shortened it down to 2 years forward currency contracts.

Thanks, Allen. Okay. There's a lot of questions here to get through. Sorry, I'm just looking through, seeing if there's any that we've already covered. A slightly different question. Can you split out the revenue growth between price and volume. And Will, I think you are going to take this.

Yes. By far, the most of this is due to volume which is both good market conditions and also gaining in market share. The price increases that we talked about are really only coming into effect now, so the extra couple of percent, that will be for this financial year relative to last year. So there wasn't anything at all significant last year.

Okay. Another question here, which I think is going to be for Will, in terms of end market exposure. What are the markets that are slowing down? For example, semicon, which I think we've already discussed, and those that could be accelerating, auto, aerospace, what does that mean for the order intake over the next 12 months? That's going to be one for Will.

Okay. Thanks, yes. So quite topical there, so I just got back from a trade show. So auto, EV investments still very strong. Lots of new metrology challenges there, which everyone is trying to understand the best technologies for solving those. And we think REVO and Equator really well placed for those, and we've had some good demonstrations, good customer visits on how we've been solving those challenges. Actually, also, as I mentioned again, we often overlook the battery side of things, and that's driving demand for some of the RAM encoders and also industrial metrology there as well. Aerospace feedback from this week actually at the show was that the demand for the projection in terms of airplane orders, it's going to need significant investment to be able to keep up with that demand, and that's going to be a real challenge. So we think actually the aerospace market is going to do particularly well. And also, I mean, I started to talk on the political environment, that there are lots of expenditure into defense. So -- and for stuff for immediate orders, and that's going to benefit both machine tool side inspection with CMM and also additive manufacturing. So yes, a few of the highlights as opposed to the -- some of the depth of the stuff that we talked about with a bit more uncertainty.

Okay. Thanks, Will. There's a question here relating to additive manufacturing. You mentioned dentistry specifically, but how wide in scope to other sectors is your AM division? That's going to be another one for Will.

Yes. So AM is going through a really interesting change at the moment where we find customers are starting to embrace and understand the philosophy of the benefits that AM can give them if they embrace new design philosophy and how to design parts, not for a traditional machine tool but design optimized for an AM machine. And this can really give them productivity advantages, cost advantages and performance advantages. What's really nice from that output is actually that means that across all sectors, really, AM has started to become very relevant. So yes, dentistry within health care is a traditional area where the advantages are understood, but now, it's becoming far more broader than this. And actually, the applications that really cut across all areas.

Okay. Thank you. There's a question here on electric vehicle market in terms of metrology. Could you explain in simple terms why metrology in EVs is more complex than petrol, diesel engines? Is the potential revenue growth from EVs a net benefit? Or this simply replaces revenues from petrol, diesel engines? So if you want, for Will.

So to make it clear, I don't think the metrology demands are more complex in an EV than a petrol and diesel, they're just different. And in the petrol, diesel world, there's been many, many years of trying to optimize, understand and work out the best way of coping with the metrology challenges. What we have is with EVs is far newer. So the metrology just coming through are different, requiring different ways of using our technologies. The advantage for us is the same technologies that we've developed for the petrol, diesel engines, because they're flexible and programmable, they can be redeployed to measuring EV. If you imagine on the electric motor and you've got the cables, the wires in it, sorry, and you're trying to measure different types of some of those, they're just different things than manufacturers are used to with traditional internal combustion engines. So in terms of revenue, I think clearly, I mean, there is still research going on, on the traditional drivetrain that's being complemented then with the new investment going in on EVs and both in clutches, gears and batteries. Exactly how it pans out in terms of overall investment, in terms of -- probably ends up being a reduction in number of machined parts, but new investment going on into different styles of the drivetrain.

Okay. Thanks, Will. Here's one, I think is -- so Allen could talk to. What are the revenue and cost implications of closing your Russian operations?

Thank you, Chris. Yes, we -- the revenue implications were, Russia contributed to approximately 1% of our revenue. And in terms of costs and the write-off, it's primarily the leasehold premises that we occupied, some demo and stock write-offs. And also some -- obviously, the -- looking after the staff that we employed in Russia, and the cost of closures of our Perm and Moscow offices. Additionally, there were some residual cash in the balance sheet, and we've impaired all of those costs.

Okay. Thanks, Allen. I'm very conscious of time. We are starting to lose people, so I think we're just going to take a couple more questions. Unfortunately, not going to be able to answer everything on here. We've had exceptionally high number of questions today, but I'm conscious of time. The question here, which is different to anything that's been asked to date. How many of your main products are now compatible with third-party software? I'm going put that one across to Will.

Okay, so 2 areas here really to comment on. Firstly, is our REVO buyback, it's high productivity CMM sensors. So here, we now have, for example, with a company, [indiscernible] company that we're seeing just this week. Some really good stuff that we're doing in collaboration, solving some challenges for our customer, where their experience with that software but wanted the advantages of REVO immediately. So you can now have that with that software or our own software, which most people are using. Also from the Equator, we now have actually a broader range of the Equator because it's a simpler product for software gauging. And again, what we're starting to see is customers who are favoring one particular sort of software and are now starting to evaluate and look at the Equator platform as a stand-alone, non-turnkey solution for us to buying the Equator from us and program it themselves. So yes, really good progress there in terms of the development work. And hopefully, we'll see a good increase from sales this year from that.

Okay. So this will have to be the last question. As I say, it's nearly 11, past 11. We've overrun, and we're losing quite a lot of people online now. So is there any geographical variance in the weakening order intake and more cautious sentiment you are experiencing? And that's going to be one for Will.

Yes. So this is more Asia Pacific here, which is partly because far more of our -- the semiconductor CapEx business is over there, and the kind of business goes -- more of it goes there. But we're also -- I mean, having just come back from the U.S., it builds a more positive economy and market conditions over there and I have a pretty more optimistic outlook going forward. So yes, a bit of geographic variance there.

Okay. Well, thanks very much. I think we'll need to end it there. So that ends the webcast. As ever, we will aim to publish a recording of today's presentation and the Q&A session on the IR section of our website by tomorrow morning. On behalf of Renishaw, I'd like to thank you all for attending this event, and hopefully, it's been valuable to all of you. Finally, just a reminder that you can download the report -- the full year results report and a copy of the financial presentation that you have seen from our Investor Relations web pages, and those will be available later today. Again, thank you for attending, and have a good day.