Renishaw plc (RSW) Earnings Call Transcript & Summary

Good morning, everyone. My name is Chris Pockett, I'm Head of Communications for the Renishaw Group. I'd like to welcome you to this live question and answer session event for Renishaw's Interim Financial Results for the 6 Months Ended December 2022. Hopefully, by now you've all had an opportunity to view the video presentation that was released as part of this morning's RNS statement. And Will Lee, Chief Executive; and Allen Roberts, Group Finance Director, are here now to answer any questions that you may have in relation to that presentation and the interim results statement. They will try to answer as many questions as possible, before we close at 11:15. I will try to group similar questions together, so we may not answer all individual questions. If you haven't already done so, you can submit questions via the question icon that you can see on the control panel on the right of your screen. Just to note that based on past feedback, it may help to refresh your browser, should you lose sound or the connection.

And now we're going to start with the first question. And this is a question relating to the competitive environment. Has the competitive environment become tougher or easier in the last 2 to 3 years and why? Is competition likely to become tougher going forward? And what can Renishaw do to manage these risks? And I think that one is going to go to Will.

Thanks, Chris. So from many years, we've faced really good competitors. I don't think this has changed significantly over the last few years. Probably the theme to draw out here that we've mentioned before is the emergence of new competition in China. I think we're pleased with how we're doing here, differentiating ourselves on performance, from the innovation we invest in, global support and also the quality and reliability of the product that we supply that's often integrated into quite high value equipment. Going forward, we always assume the competition is going to do a really good job. And our strategy is going to remain unchanged here that came to that, that we're going to continue to invest in the R&D to make sure that we are supplying a differentiated product and make sure we're there to support our customers around the world with the high quality products and also investing in our manufacturing to make sure that we can maintain that and respond to their needs.

You touched on R&D then, and we have a question relating to that. So that is, from many years, your R&D has averaged around 10% of sales. Will that be sufficient going forward?

Yes. As you said, it links in well with the previous question there. So we certainly believe so that the positive for us probably in this half is we talked in the past about the last few years we've had a lot of challenges with supply chains and actually more of our engineering spend has actually been on making sure we keep products going out the door. You can see for the numbers now. We've actually got more of the engineering effort back on to innovating for the future. We believe with this, it's more about the productivity of making sure we're getting the key disruptive products coming through from our investment. And we think that will really place us well going forward. So we don't see a long-term significant change in the amount of percentage that we are going to be investing in R&D.

And got a question here, which I think is going -- go to Allen. You've been building a net working capital inventory for an extended period of time citing safety stock, including around 49 million in FY '22 and a further 49 million plus in H1 2023. Trade working capital seems to have reached a new all-time high relative to sales. When or where do you expect working capital to peak, normalize in light of destocking trends at your customers?

Yes, it's a good question. Increase in our net working capital has been primarily driven by our inventory increases, as you rightly say. Over the last couple of years, the supply chain have been very difficult for us and for many organizations. And we have been building safety stock and quite extended safety stock levels, to be perfectly honest with you. And so what we are seeing now is, there's more stability, becoming more normalized. So we do expect, not particularly this year, but into next year, a more normalized inventory level to turn over. And which is the particularly driver between for our net working capital increases. So we must bear in mind also that we do have a very short order book, typically 2 to 3 months for most products and planning is also quite difficult. So we got to get appropriate inventory and to map what our planned… production plans are.

I think, Will, would you like to add something to this?

Yes. I think building on what Allen said, actually, this is a real area of competitive advantage for us. If you look, we have a very automated manufacturing that's capable of ramping up quickly. We need the inventory to allow us to do that. Now as we've seen at the moment, for example, that our electronics business of selling encoders is weaker. We know when that ramps up. It ramps up very, very quickly. And our ability to respond to that is key in making sure that we're keeping our customers supplied and gaining market share often when we can supply and others can't. So it's vital for us. It's a really tricky balance, but it is a core part of our strategy going forward.

In the first half, the increase in inventory was primarily in our Position Measurement product line. So we should be in a very good position when the market uptake arrives.

We're going on to a question that we've received in relation to CapEx, I think that's probably going to come to you, Allen. So the question, previous guide for Miskin was for GBP 30 million CapEx in FY '23 and over GBP 60 million in total versus now GBP 65 million for FY '23. Are you accelerating the build-out for what is driving the change in phasing?

Not been any change in the phasing of the development. We spent about GBP 7 million in the first half. We're planning to spend around about GBP 25 million in the second half. The balance is other production equipment. So whilst we're expecting GBP 65 million for the total of the year, GBP 25 million of that is destined to further Miskin investment with the balance being paid in the first half of next year with completion due to take place at the end of December for whole 3.

Different area now to move on to. This question I think is going to go to Will. And the question is, what is the likely impact on Renishaw's business of the U.S. government's export control measures versus the Chinese semiconductor and telecom industries?

Thanks. So the semiconductor stuff here, it doesn't affect us directly. So this is affecting our customers and particularly really the customers that we sell encoders and laser encoders to. So in terms of how it's going to affect those customers and their demand, then probably the most relevant information is from looking at where they are selling to and their markets. What is interesting also coming through here probably though is the growth of the domestic Chinese industry here. So Chinese manufacturers have somebody that's an electronics equipment which seems to be accelerating and going well and these are customers of ours as well for our encoder family of products. So we are seeing interesting growth there in some accounts of the more domestic markets. So whether that's to do with U.S. government export control on U.S. controlled equipment or it's just that the natural what is happening in the growing Chinese market, don't know, but that's what I would comment of what we're seeing on the ground there.

Will, we'll stay with you, I think for this one. Please comment on how your order book is trending; growing, declining or flattish? If the order book is growing again already, when did it trough, I think I was meant to say? And again...

Okay. So let me talk about -- we have a really healthy order book at the moment. It did peak back in the summer, but at the moment it's relatively flattish, we would say. So no great changes there at the moment. It's not really ramping up quickly at the moment, though.

It's a question on price rises. How come you choose to raise prices only by 2% given the highly inflationary environment? I think Will is going to take that one.

Yes. So the 2% was the round that we have done which is coming through at the moment. So actually, the impact of that in the first half has been relatively limited. We'd expect to see more of that coming through as that lag of orders comes through into the system. It's always tricky for us to choose what to do on pricing. So clearly, we're always looking at increasing pricing. But we also want to be making sure that we are -- we operate in high margin markets. So the margin we make on our products is high. So the number one thing we're really looking at here is trying to grow market share. So getting new accounts and new business in. Now our real strategy for doing that is through the innovation that we put in and the quality of the products that we make, the support we give our customers. But actually, there are other reasons why we end up gaining market. And sometimes that's because it can perhaps let one of a potential customer dine through quality and reliability. And the other is through pricing, which tends to open up the opportunity for us to get in there and get that business. But the margins we're looking at, that is a more profitable growth strategy for us often than trying to look at the pricing. So we're always balancing these things. Decisions have been made, pricing increases have been cut in and we'll be looking at this again and going forward and seeing what we think we can put and it will be different on all our different product lines.

I got a couple of questions now on margins, which I'm sure going to Allen. Firstly, do you expect margins to improve sequentially in H2 versus H1? And the second related question is, what is the long-term adjusted PBT margin that the Group targets?

Okay. Taking the first point. In terms of margin, our gross margin, we look to be somewhat similar to the first -- as in the second half compared to what it was in the first half. With the profit before tax, we're looking at a similar -- depends on the range, we're looking at a range from around about 21% to 23% depending on the extremities of the forecast. With regard to long-term adjusted profit before tax Group target, internally, we got this target of around 25% ROS, is sometimes we achieve, but over the medium term, we've been around about 20%, between 20% 25%.

Next question, which I'm sure Will pick up. Can you specify the growth rate for semiconductor encoders in the half year? And your outlook for recovery in this segment? That's going across to Will.

Yes. So with semiconductor encoders what we're talking about here is our encoder family that we sell in to semiconductor electronics market, so I'm taking the question of which we have 2 separate product lines actually and it's interesting to look at the difference here. So we have laser encoders. These go into early stage. So front-end equipment for semiconductor manufacturing. And what we're seeing here is we have actually seen good growth over the first half. And what we think probably is happening here is the lead time that our customers give their customers on these products is quite long and this is part of a very long strategic planning on these. Whereas the encoders, a lot of the encoders goes into the more back-end semiconductor packaging up of the semiconductors and a whole range of different equipment there. We think actually that the lead times from our customers to our -- their customers on these are much shorter. And actually, this is an area that has seen a significant reduction in this first half. Now because of these lead times, this is the one that we always see it will cycle very quickly. Now what we don't know and we are struggling to understand from those customers, I don't think they know themselves, is exactly when this is going to recover. We know it will. We know when it does it will recover very aggressively. And our customers will expect those products very quickly in high volumes. But we just don't know at the moment any clarity from that and exactly when this will happen. They never tend to forecast more than a few months from where we are at the moment. They just don't know.

We had a question earlier about CapEx on Miskin. I think Will probably this is more relevant for you. It's related to that expenditure and expansion in Miskin. My question is given Miskin expands the production footprint by 60%, is it reasonable to assume that is the level of growth you're aiming for in the medium term, defined as 2 to 3 years by the questioner, unconscious revenue might not scale proportionately with production space?

So clearly our plans are for aggressive growth. That is us. But you should not draw a correlation between our manufacturing space and our growth targets. One of the bits here will be, actually if you look at it, some of our newer products that are growing well, ranging from additive machines to gauging systems to enclosed encoders are significantly larger than the products that we're used to making, and therefore, need more floor space. So don't draw a correlation between those 2.

We're going to move on to a question now around currency. Given 1% overall constant currency growth, is it correct to assume that volumes overall were negative? And I think Allen's going to pick that one up.

I think that the volumes are pretty similar given the 1% growth. There is probably a small impact because of the price increases. But overall, we've seen sort of in certain market segments increased volumes, and particularly in the semicon, we've seen a reduction in volumes. But overall, depending on market, volumes are sort of similar.

A question here for Will. How does trading develops in the early weeks of 2023?

Yes, no huge changes here since what we saw at the end. The big bit this time of year is Chinese New Year, which is always with the importance of Asia to us is a quiet time for that region. That's coming back. And we probably expect with a combination of the COVID peak having been and gone in a lot of the China areas that we are working with. And year over then it's going to be interesting to see how things start to accelerate going forward there.

Currency question here, which I'm sure, Allen will pick up. The H1 results show 6% of the revenue growth is due to favorable currency. Can you give an indication of the currency impact on profit. With Sterling strengthening against the U.S. dollar in recent months, are you expecting currency headwinds in the second half? And that's going to go to Allen.

The 6% currency gain, which is around GBP 20 million is measured excluding the impact of the forward contracts we use. In our adjusted profit, we've 4 contract losses of circa GBP 13 million compared to a small gain of about GBP 300,000 last year. Additionally, our overseas costs have increased by around GBP 4.5 million due to currency. So the net benefit of these items on profit is around about GBP 2 million. Looking to the second half, sterling has strengthened against the U.S. dollar, but it's weaker against the euro and yen. And we also have better forward contract rates in half 2. So based on the current rates, we would expect to see a benefit in profit in the second half.