Renishaw plc (RSW) Earnings Call Transcript & Summary

Good morning, everyone. My name is Chris Pockett. I'm Head of Communications for Renishaw, and I'd like to welcome you to this live Q&A session for Renishaw's interim financial results for the 6-months ended December 31, 2024. Hopefully you've all had the opportunity to view the video presentation that was released as part of this morning's RNS statement. And Will Lee, our Chief Executive; and Allen Roberts, Group FD; are here now to answer any queries that you may have in relation to their presentation and the interim results statement. We'll try to answer as many questions as possible before we close at 11:15. I'll try to group similar questions together so we may not answer all individual questions. And in fact, we've had a very large number of questions pre-submitted already. 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.

So we're going to start with a question around semiconductor market. At the Q1 update, you sounded cautious on the outlook for semiconductor, and this has reversed in Q2. Can you remind us what visibility you have in this market? I think that one's going to go to Will.

Thanks, Chris. So our visibility here is through the sales of our encoder family of products. So optical encoders, laser encoders into equipment manufacturers for the semiconductor industry, and that's a wide range of different equipment that we supply into there. What we see here is clearly there is always uncertainty here. There's uncertainty, particularly in some of the back-end areas of the semiconductor with uncertainty of our customers on the exact order quantities they're going to get from our business. Our customers will place orders on them -- on us, but we do know that they will change their orders on us both up and down at very short notice. So it's great to see the improved order book. We have uncertainty there as well.

Okay. Thanks, Will. Another question here on end markets. So beyond semiconductors and consumer electronics, can you give us some color around what's happening in your end markets? And Will, back to you.

Yes, so I guess continuing themes here probably. Aerospace, probably being the standout as positive. I guess change is probably the most interesting here. We are seeing more investment going into hybrid in automotive, which is clearly good for us in terms of both the ICE measurement and EV measurement too. Most of our route to market in here, though, is still through machine tool builders. What we see here is there are some regional differences. Probably the 2 most challenging markets at the moment are German machine tool builders, all by the smaller Taiwanese area there. Japan is sluggish, okay, the machine tool builders there're benefiting from the weak yen. Some signs of a slight uptick there, we will see.

Another question on end markets. Can you describe the demand situation in China or Asia, generally? I think you've touched on some of this already, but perhaps specifically China.

So China overall is doing okay, some tough comparators with last year. For us, probably the interesting bit here is how the consumer electronics side was up this half where there's positive signs, and we've signaled that, again, always uncertainty on exact timing there of when that happens and the volume, which we never know about until very late notice.

There's another question that's going to be coming back to you. This relates to industrial metrology. Some peers, including ABB and Hexagon have suggested a flattening out. Are you seeing the same?

I've probably touched on this already. I mean, one of the big areas here for us is machine tool builders. That's how we tend to look at the health of the overall market. And I've mentioned some of the regional differences there. I guess the other bit that's maybe different for us is some of what we describe as our emerging markets. So in this area, this is our CMM engaging systems, where actually this is really, for us about growing market share, as opposed to relying on the underlying market growth. So that's the opportunity we have really to outperform here going forward.

Thanks, Will. And unfortunately, another one coming back to you. It's revenue related. So H2 2024 revenue was GBP 361 million. The implied H2 2025 of your guide is somewhere between, well, it's between GBP 354 million and GBP 394 million, so minus 2% below to plus 9% above the prior year. Given your comments about strengthening order intake in multiple areas of the business, what is driving the low end of the guide below prior year? Over to you, Will?

Yes. So this lower end that is a 4% increase on the first half of the year, may sound like we're being cautious. We do have uncertainty out there, as I've talked about, it's great to see signs of improving semicon, this is particularly pretty similar stuff on the more back-end of semiconductor, and also indications on consumer electronics there, again, with the uncertainty I've talked about. Also, real uncertainty, I think, with some of the more Europe and Americas. Americas feels actually quite positive at the moment, but clearly, we do have a lot of political uncertainty going on in these markets.

Okay. Moving to a question which I think we'll give a little rest to Will. So this is one going to Allen. And what is driving the wide range of the H2 adjusted profit guidance of GBP 47.5 million to GBP 77.5 million? The range is GBP 30 million wide, which feels high as the H2 implied revenue guide is only GBP 40 million wide. What are the main swing factors? And that's for you, Allen.

Thanks, Chris, and good morning, everybody. The profit range is primarily driven by the revenue range with a very high gross margin that we achieve dropping straight through to the bottom line. Most of our costs are fixed, particularly labor, and there's little opportunity to reduce them in the coming months. So it is very much revenue driven.

Okay. Thanks, Allen. And this one is for you as well. This is relating to cash. Please can you confirm the operating cash requirement of the business in the current part of the cycle? Why is excess cash not returned to shareholders in an accelerated fashion, also in light of record level cash conversion and significantly lower CapEx requirements following the investment cycle? It's for you, Allen.

Thank you. We have had very good cash conversion in the first half with much lower CapEx, in particular property following a few years of significant spend at our Miskin site in South Wales. We're regularly reviewing our forward cash requirements to protect ourselves from downturns, allow us to react to market growth requirements and future capital expenditure requirements also.

Okay. One for you here, Will. How much longer do you intend to cross-subsidize a loss-making medical device segment with the core business? This one's for Will.

Okay. So in general, we do have a few emerging businesses across the group. These are not really helping with group profitability at the moment, but they are ones with high growth potential. These are receiving quite a bit of focus. And it's been really good to see actually with the strategic initiatives we put in on both our additive area and metrology systems, focusing the sales and some key innovations coming through, some really good progress there continuing. With the neuro area, it is an area of business that we have talked about looking for external investment due to its sort of different strategic fit with the rest of the group and we will continue to prioritize this going forward.

Okay. Thanks, Will. We've had a number of questions in around the supply chain quality issue that was talked about in the presentation and the statement. So it's about 3 people have asked a very similar question. So if we just step through that. So you mentioned we have also experienced a specific supply chain quality issue during Q2, which has resulted in around GBP 2 million of nonrecurring costs. Could you elaborate on this and give some more detail? And what controls have been put in place to limit the possibility of this happening again? And also in addition to that, what was the revenue impact of this supply chain issue?

Okay. So yes, we did unfortunately have a quality issue due to an issue with supply chain. I think when you look at it and go through detail, it would have been very hard to have predicted. We have put measures in place to absolutely mitigate the risk of this happening in the future. I think the positive bit here is from our manufacturing control, we were very quickly able to identify affected products. Our priority here is to take a safe risk, working closely with our customers to make sure we are prioritizing them and getting product to their customers when we have these issues. Very busy at our manufacturing site where we make these sensors, catching up at the moment with some pent-up demand there. In terms of how much that is, it's not hugely significant in the grand scheme of things from a revenue point of view, there's probably about GBP 1 million or so of impact of orders drifting into -- from H1 to H2.

Okay. Thanks, Will. This one is going to go to Allen. There were a significant number of one-offs incurred in H1 totaling GBP 5.5 million, GBP 2 million of supply chain costs, which we've already talked about, GBP 1.8 million of restructuring and GBP 1.7 million related to currency losses. Please elaborate on the total amount of one-off expenses included in your full year guidance. And that's for Allen.

Thanks, Chris. We don't currently expect to see supply chain and restructured costs recurring in the second half. But we do hold a contingency in our remaining forecast for certain unexpected costs. And we do have very good confidence in our forecast range.

Okay. Thanks, Allen. I think this one is going to go to Will. You mentioned a net head count increase of 98. Could you give us an idea of the existing staff turnover or churn rate for the last few years? That's Will.

Yes. So maybe just to add a bit of flavor on this as well. So with the majority of our head count increase is early careers. So this in the U.K. is the majority of our talent recruitment coming through developing internally. So we have taken on a number of apprentices and graduates there. In terms of our churn, then this has reduced. So voluntary churn is now down below 5%. This has been on a downward trend for the last few months. Headcount budgets across the group are very tight at the moment as we focus everybody on productivity and making most of the people that we have. And then there are some of our key initiatives going on visiting our Miskin manufacturing site this week, for example, and seeing the investment that we are putting in, in terms of automation, allowing us to meet the increased demands for the future with the same number of people and also seeing the investment that we're putting in a big systems change within the group as well.

Okay. Thanks very much, Will. This one is going to go Allen's way, I think. Please, can you walk us through how your hedging works, both from a revenue recognition perspective and further down the P&L as this appears to have caused significant variability between Q1 and Q2 results. That's for you, Allen.

Thank you, Chris. Hedging, we take out forward contracts for 2 years to mitigate expected U.S. dollar, euros and Japanese yen net cash inflows. These are recognized in revenue in each month when we mature. Two years ago, the mini budget caused -- give us -- led to some significant movements in currency markets, which enabled us to lock into some favorable rates at the time. And they matured and came through, particularly on the euro and the yen and in particularly, the yen actually and the dollar. Further down the P&L, aside from cash flow risk and hedges, we have currency risk arising from our currency-denominated intergroup financing balances, and we mitigate these as best as possible using monthly forward swaps. And both of these elements are recognized in the financial income and expense. And over time, they should balance out to 0, but there are monthly fluctuations attached to this.

Okay. Thanks, Allen. I think we're staying with you. It's another currency-related question. How do you think about the FX impact going forward with the recent U.S. dollar strength?

Well, U.S. dollar strength is typically beneficial for us as our revenues translate at higher sterling values. As mentioned above, we do have forward contracts in place, which mitigate these movements in current year P&L. Our forward average rate for the half 2 is $1.24, which is actually similar to the current rates. The forwards we're now taking out for 2027 will be partly locking us into the current prevailing rates.

Okay. Thanks, Allen. A couple of questions now relating to order book. As the order book appears to generally give 3 months visibility, are we right to assume that the guided range for the full year is 75% already accounted for by performance in H1 and the order book? Or is it lower than that, noting that August and December tend to be proud months? Will, are you going to pick up on that?

Okay. So this goes back to our traditionally and always short order book. 3 months would be nice as a long-term trend here. So let's take the positives. We've certainly seen an order intake uptick, and we've talked about that already. So that's the positive. The challenge for us is when we're looking with the short order book, it's not only a short order book, but it also has the opportunity to change as well. So we talked a little bit about here. So from a sensor point of view with repeat customers, we will -- if they change their needs from their customers, we will match that. So the order book can still go up and down as we reflect that. As we move more into capital goods, then we can also get -- there's clearly things that are inside of our control as we're ramping up manufacturing on particularly areas such as CMM systems and making sure we get the things under our control and product shipped. But secondly, there's also things that will be outside of our control here in terms of customers sometimes wanting to delay product shipments by a month or 2 because their own facilities aren't ready for issues with government export controls and paperwork being ready. So we have a double whammy of a short order book and some uncertainty even within that order book. But all in all, positive news there.

Okay. And linked to order book, just a comment. It appears like the order book has been improving across all regions. Could you give any additional detail that would be helpful, for example, a rough idea of the growth of the order book and what is driving the improvement in orders. That's, I think, staying with you, Will.

Yes. I think I probably touched on most of this already. So we've talked about a bit with the consumer electronics and with position measurements from semiconductor, most of that naturally happens in APAC. America, though, also looks positive. I think I mentioned this earlier. So despite political uncertainty there, that market is positive. EMEA, again, I have talked about this already, actually, particularly with Germany is flat.

Thank you. China, almost inevitably. China demand and pricing. The video and statement touches on pricing pressure in the region. Where? And is it still ongoing? I think that's for you, Will.

Yes. So no difference really here, I'd say, to what we talked about last time we gave an update. We do see competition across the board in China as most others are at the moment as well. We certainly have the premium product in terms of what we can do in terms of performance. So we are preferred. In certain areas, there will be stuff where some customers, there is a good enough where actually more entry-level products are fine, and we are navigating our commercial strategies and product portfolio decisions around that. So with a more tiered structure, specifically for the China market. Where we need to, we'll also make sure we're defending our IP, particularly if there is exports coming out of China with products that we feel infringe our patents.

Okay. Thanks, Will. And I think that's covered off was another similar question that we had in about China as well, but I think you've covered that in that answer. Moving on to product mix now. There are several references to mix and it being adverse. What are the moving parts behind this? And why is analytical instruments so soft? That's back to you, Will.

So analytical instruments is slightly behind equivalent for last year, decent order book and not too worried there. It tends to be with the nature of that business will have a bit of variation as we go through the year. In terms of product mix and impact, I guess, going through on profit, then we will always see fluctuations from product lines with higher gross margin to lower, sometimes even from one customer to another. So we always see a bit of variation depending on the mix and the impact that has on gross margin.

Okay. Linked to part of that question. So what is the outlook for analytical and medical devices in H2? It's disappointing to see that dip back into loss in H1. Will?

Yes. So I think I probably already talked about this from analytical instruments, the order book looks decent. So hopefully, that all fits in as well there. And I think it's the same, particularly from the neurosurgery part of our medical business, the pipeline looks healthy.

Okay. This might be something that both of you might want to comment on. What cost actions are you able or willing to take in order to achieve your 20% margin goal? And also, should this be seen as an ultimate target or a through-the-cycle target? Perhaps Will, you start with that one.

Yes. Okay. So absolutely, bottom line is key for us here. We have, I guess, a few areas here that I've touched on the emerging businesses. The growth in those is going to be absolutely key for us on delivering our medium term growth plans and the impact that they will have on the bottom line. The other big focus, and again, I think I've touched on this already is on productivity around the group. This is in all areas from the obvious stuff that you can see from a manufacturing and automation, driving down product cost through to making the most of the people that we have with a really targeted key innovation plan and a focus on the most profitable business opportunities that we have with our sales force.

Okay. Allen, would you like to add anything to that?

I would just add to that, that we are putting significant investment into IT transformation right now, which is hopefully going to show benefits in the years in the -- definitely in the medium term.

Okay. Thanks both. Pricing again. I think we covered some of these issues, but I'll go through it. You cite ongoing pricing pressure in the APAC region, which is impacting your gross margin. Has price deflation worsened significantly in H1? And are you accepting the price downs to maintain market share? Or are you walking away from some business? And that's one I think for Will.

Yes, I don't think anything's got worse here. I think this is about the same in terms of accepting price downs, then our strategy here is in differentiating. This is really in the sensors business rather than the capital goods between our premium products and entry level to compete in some of the more mass-market areas. We've always walked away from business if it doesn't meet the gross margin requirements that we have. This will occasionally happen.

Okay. More around demand end markets. So machine tool orders have been growing year-on-year in calendar Q4 across China and internationally. Why was your industrial metrology product demand for machine tool builders down in the period and in contrast to the wider trends? Will?

Yes. So I think there's 2 bit. So the reason -- most reason it was down was due to consumer electronics demand being weaker. I think 2 things then. So when you look at the stat being quoted there, that's order intake, which is separate to delivery. And this can contain also you got to be quite careful with this data because the range of different things that are classified as a machine tool will almost range from a pillar drill to a high-end 5-axis machine tool for aerospace. So yes, you need to be quite careful of analyzing some of that data.

Okay. I think we've answered most of this, but it's around semicon and consumer electronics, so orders picking up. And the question really is how sustainable do you think this trend is?

So this goes back to our, I guess, our overall strategy presentation and looking at these markets. So thankfully, both of these areas, we see underlying growth in whether that's the semiconductor manufacturing equipment or machinery for making consumer electronics. They are cyclical and trying to predict the short-term cycles feels very, very difficult, which is why we continue to invest in the sort of manufacturing and manufacturing automation to make sure we can respond to the demands as and when they come quicker. Exactly how quick and what the longer-term trends are, I don't think any update from what we presented at Capital Markets Day.

Okay. We've touched on this. This is around pricing again. I think we've touched on most of this. Just perhaps a slightly different slant on this, which is given your strong market position in technology, why are you not able to pass on higher labor cost to your customers? It appears at the moment, you're absorbing these additional costs resulting in pressure on margins. Will?

Yes. I think I've answered some of it already. I guess the bit probably to highlight here is that it is different in different areas. We are introducing price increases in some areas of the business, gauging systems, in particular, services. Sometimes that will be offset then in terms of some of the other areas of business where we may be selling more entry-level product at a slightly lower margin in some other areas. So a complicated picture where we're winning in some areas and more pressure in others.

Okay. We've got around 15 minutes remaining for the session. We have 3 or 4 more questions [Technical Difficulty] in. So just a reminder, if you would like to submit questions, just look at the question icon on the control panel on the right of your screen. Thank you. Okay. Almost inevitably, this topic comes up. I'm surprised it hasn't earlier. So tariffs. Do you think there is a risk that elevated uncertainty resulting from erratic U.S. policy causes customers to pause CapEx decisions over the coming months and that as a result, any potential benefit from reshoring investment is deferred? That's one for you, Will.

Yes. So again, I think we've touched on this briefly. I think you've got 2 different areas probably in the U.S. going on. Certainly, there is uncertainty, and we will see what happens in terms of policy and how quickly things change there. I guess the certainty that has happened after the election back at the end of last year is knowing which regime is going to be in power. And that tends to give the certainty which is required by business to start to invest. So I think you've got some certainty knowing that it is a Republican administration versus uncertainty on exactly what they are going to do. I don't think we're seeing any massive negative impact of that at the moment. As I touched on earlier, U.S. is a positive market for us at the moment.

I'm just looking for another question on supply chain, but I think we've answered that one. So very specific question here. We certainly haven't addressed this previously. Can you outline the medium term opportunity for Renishaw from cobots and rising automation penetration generally? Are there any specific new opportunities to address here? I think this one for Will.

So, yes, I would say there's massive opportunities still for us in terms of automation from a manufacturing side, maybe not so much the cobots, but I think if you look at the robotic automation that we're putting in, utilizing some of our own actually metrology products from our new IPD product line at the sites of both Miskin and Stonehouse. And also, if you look at the theme, and again, we're doing this off of the ability to do more measurements on the same platform, negating the need for automation. And again, we're seeing the benefits of that in our own manufacturing and also selling that with customers. I think the plan is at the moment for Capital Markets Day to be incorporating a tour of our manufacturing site, and I'm really looking forward to showing everyone around because this really comes through when you see it in practice of the difference that it's making to us, helping us with our gross margins, but also the sales message that we have for our customers there as well. That's why we're so impactful.

Okay. Thanks, Will. Thanks for plugging CMD as well. Details will come out in due course. Slightly different question here. How long do orders take to feed through to sales typically? One for Will.

So massive variation here. As I talked about earlier, we do have customers that will want orders extremely quickly without much notice. So we may get orders in particularly from things to do with semiconductor or -- sorry, special projects, consumer electronics, where we will be getting an order and shipping very quickly. That's where we rely on our vertical integration and our stocking policy to make sure we can respond. In other areas with sensors, we will typically get more of a call-off demand and more visibility on how things are going and more stability. And then with things such as some of the more capital goods products, typically often the sales process involves the customer actually preparing and getting ready for taking those machines themselves. So there is a longer typically. Although we do still get actually when we have product ready to go, it's amazing how often we will end up getting some short-term orders there as well.

What are the implications of the passing of Sir David McMurtry? And is it possible to have an update on how his stake is going to be managed from here? That's I think one for you, Will.

Yes. So as I talked about in the webcast presentation, it's been a really sad time for everyone that knew David here at Renishaw and worked so closely with him for so many years, particularly though and most importantly for his family. And we spent a lot of time with the family during this really tough time. Clearly, with Richard and the planning with Richard being on the Board has, I think, given all the staff and everyone a real sense of continued family involvement and from the messaging that they have given. So I think it's just an overwhelming sadness and making sure that we do everything that's best for Renishaw and continue and develop on this legacy.

Thanks, Will. It looks like this may well be the final question, it's around margin, gross margin. No, looks like we've got a couple more coming in. Does the mid-60s gross margin medium term guidance factor in competition in China remaining tough? This one for Allen, I think.

Yes, it is tough. But I think the productivity initiatives that we were taking to sort of address margin and staying ahead from a technology perspective is a very strong lead for us. And I think that's where we are focusing. And yes, it's tough, but we're sort of doing something about it.

Okay. Will, would you like to add anything to that?

No, I don't think so. Certainly, yes, competition is going to remain tough [Technical Difficulty] that has to be forecast into all of our factors and forecast and has been. I think one of the areas we're investing quite heavily that we haven't talked about is software for the future with, I think, some real developments there over the next few years, which will also be really helpful in terms of that gross margin development.

Okay. Coming back to the Q2 versus Q1 profit underperformance on broadly flat sales effects supply chain restructuring impacts have all been covered, but you also mentioned mix. How much of this was a factor? And can you elaborate on this, please? Will, to start?

Yes, the effect we're talking about here is having a range of different products with a range of different gross margins. And then also, there will be always a variation in pricing, particularly operating in so many different markets with currency as well. This is an area probably that in terms of understanding and developing. It is a complicated picture. I think it'd be wrong for us to put a specific number on this and try and give any flavor on the individual moving parts, but it is something that we are looking into more closely as we develop a bit more focus and sophistication on our pricing and discounting.

One for Allen here. Could you please let us know what operational gearing ratio we should assume on your volumes growth in the future, i.e., what level drop-through ratio you see from sales to operating profit? And is this the ratio you use for H2 implied guidance calculation? That's one for Allen.

Yes. I think we picked -- I think we just sort of covered this a little bit earlier, but we do look at it. There is a high drop-through from revenue and it drops straight through to the bottom line, and we're talking around about 75% of that sort of nature drop-through, and that is what is projected in our forecast going forward.

We used to get a lot of questions on additive manufacturing. And this is the first one on this particular webcast. Can you give us an indication of the rate of growth in the AM product line in H1 '25? Has the order book grown year-on-year? And I think that's one for Will.

Yes. So very pleased. We don't comment on specifics, but it has been a very good growth relative to the half 1 of last year, but that was a weaker half 1 that we had last year. I think overall, the positivity here is actually with -- particularly with the recent innovations that we talked about with TEMPUS, we have a really competitive product on the market. I would say it's market-leading in the midsized machine area that we are in. And we are seeing really good development with a lot of key accounts and repeat business coming through. It's an area we will need to look at investing more in probably from a dedicated sales force point of view to make the most of the products and the innovations that we have.

Okay, Will. That looks like that's it. I think, as I said, we haven't necessarily answered every individual question, but there's been a lot on very similar themes. So hopefully, we've covered off all the topics that you've submitted to us this morning. So that now ends the Q&A session. We'll aim as ever to publish a recording of this webcast 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 this event, and have a good day.