Oxford Instruments plc

Good morning everyone and welcome to the Oxford Instruments half year results presentation. Thanks for joining us today. We provided an initial overview of the shape of the first half of the year in our trading update a few weeks ago. Today I'm going to begin with the key highlights of the period and then I'll hand over to Paul for the financial review before returning to the detail on our strategic progress with some pointers into the second half and beyond. There'll also be an opportunity for questions at the end, both in the room and online. Since we last met in June, we have made another six months of good progress on our strategy to simplify the group, improve commercial execution and realign our regional presence, laying the foundations for future growth and margin expansion. At the same time, the team have had to contend with more significant disruption than anticipated in the trading environment as a result of the global tariff and trade volatility, coupled with funding challenges in academia. As the results show, the first few months of the year were challenging in our higher margin imaging and analysis division, while we are working with our customers to align on a new trading landscape. By contrast, in advanced technologies, we've made great progress with 25% order growth coming from our compound semiconductor business, attracting increasing numbers of commercial customers focused on R&D and production. Across the group, our market leading technology and expertise continues to position us for good growth in structural growth markets. So despite the disruption in Q1, we ended the half with positive orders and book to bill, and the Q2 order momentum back to that of prior year. We're into the second half with a full order book to support another year of good growth in advanced technologies, and with demand improving in imaging and analysis, we expect to deliver a strong H2 broadly in line with last year. We're seeing a good return on our investments in technology with a number of new recent product launches, and I'll share more about those later. Cash conversion was moderate in line with prior H1 periods for Oxford and reflects the trading conditions. We expected to normalise to our target levels in H2 with strong free cash flow ahead. The balance sheet is strong with net cash at £45 million and around £57 million from the sale of nanoscience to come. Our share buyback programme is well advanced with just over £30 million has been returned to shareholders since June and we'll be extending it by a further £50 million to a total of £100 million. Now, I'd just like to zero in on the Q1, Q2 dynamics. And there were two main factors to keep in your mind. Firstly, tariffs and their impact on trading. And secondly, US academic funding. Let me take you through the slide starting on the left-hand side. We had anticipated some softening of demand from the US administration actions, but the impact turned out to be more extreme in Q1. As a major exporter, we've been managing multiple changes in the global tariff landscape since April 2nd. Customers have had to re-evaluate their budgets and spending plans, while others have had to request additional funding over and above that allocated to support new purchases. Initially, we focused on working with customers to reprice the open order book to cover tariff and then moved on to active quotations and the opportunity pipeline. And as we indicated in June, we were able to protect margin and achieve recovery of new tariff costs, meaning our strong contribution margins have been successfully maintained. Q1 also saw the significant cuts proposed to academic funding by the White House. Shown here in billions of US dollars, We show this in the chart in the middle, the grey bar, meaning a sizeable reduction in funding was being digested by our customers in the US, leading to delays in purchases. As we move into Q2, the chart shows you the evolution of the proposals as they went through Congress. we're seeing a potential normalisation of US funding, shown in the orange bar, back to prior levels, both the National Institute of Health and the National Science Laboratory. Starting to give customers more confidence their future funding will be intact and to start buying again. Our US team has also been proactive in helping customers seek new funding sources and build up our commercial customer base. Moving back to tariffs, for some product lines, we have also worked quickly to relocate some assembly locations to help our opportunity and mitigate the tariffs. And then, with the retaliatory imposition of restrictions on rare earth supply impacting supply chains, our engineers have created new engineering solutions and helped to resource supply where possible. So despite many distractions and impacted demand patterns, the whole Oxford team have done an excellent job to overcome the headwinds and deal with the fluctuating demand challenges, culminating in the environment stabilising through Q2. So with that, let me hand over to Paul for a deep dive into the numbers.

Thanks Richard and good morning. So moving to the first slide, I wanted to first highlight that all the information presented today is for continuing operations and excludes all revenues and expenses directly associated with our nanoscience business, which is now reported under discontinued operations. As Richard has already explained, despite the disruption to order intake in the first quarter, Overall, orders have grown in the first half on a constant currency basis and flat on a reported basis. However, the profile of order intake over the first quarter has had a significant impact on revenue recognising the period. Our imaging and analysis business runs on relatively short lead times, meaning the gap in orders has directly dropped through to revenue in the period. In our advanced technologies division, we've seen very strong order growth throughout the first half, with a step change in Q4 of last year. Revenue is yet to pull through as a result of short-term shipment delays and lead times in this division, but we are expecting strong revenue growth in H2. Both gross margin and overheads are in line with last year, and with a relatively fixed cost base in the business, changes in revenue quickly fall through to adjusted operating profit and AOP margin, and we've seen this drop through in H1. Moving to revenue in more detail, the imaging analysis division was most impacted by the order profile we saw in the first half. Whilst opportunities in the form of confirmed customer interest continued to rise in the first half, customers have taken longer to convert these to firm orders. In advanced technologies, order growth has been consistently strong since Q4 last year, but given some timing delays and lead times in the division, we are yet to see this growth pull through into revenue. However, the order book is full for the year, and we expect to see early team revenue growth in the second half as we execute on this. Currency has continued to be a headwind in H1 versus the prior year, with sterling strengthening versus the US dollar, but we've seen that trend reverse recently, and I'll touch on the impact of this later. Imaging analysis. So this slide gives you a snapshot of the profile of imaging analysis in the first half. Here you can see the uptick in both orders and revenue in Q2 versus a low Q1, with orders moving back in line with the prior year, but revenue still lagging this recovery. On the right, you can see order intake by end customer type, which shows a broad-based impact across both commercial and academic customers. U.S. academia has been quite resilient in terms of order intake, but revenue in the first half was heavily impacted, down nearly 25% on the prior period. The book-to-bill ratio for this division is above 1, and we expect INA to trade in line with H2 last year. So far Q3 is tracking in line with our expectations, but order intake for this quarter will be key, and we plan to update the market on progress in mid-January. On the next slide, you can see the same data cut for advanced technologies where you can see the strong and more consistent order growth in both Q1 and Q2, building on a very strong Q4 from last year. Whilst revenue in Q2 was significantly higher than Q1, we are yet to see this growth pull through into revenue due to the timing delays and lead times I mentioned just now. On the right, you can see the significant growth in commercial customer orders, up 34%, which made up more than half of the order intake in H1. This shift has been accompanied by increasing numbers of orders for larger multi-chamber systems, mainly from the US and Europe-based customers. This has contributed to higher average selling prices, but also to longer lead times. Academia outside the US has grown strongly in H1, mainly large systems for quantum-related semiconductor applications in Europe. Again, as we execute on a full-order book, we expect to see this translate into early team revenue growth for the division in H2. So moving to adjusted operating profits, you can see the drop through to operating profit from the H1 revenue gap. Gross margin was steady at 55% and overheads fell slightly. Given the relatively fixed nature of the cost base, incremental revenue converts to incremental operating profit at a very high margin, and we expect to see this strong operational leverage effect in H2. As I mentioned earlier, currency has continued to be a headwind in H1, impacting overall margin by around 100 basis points. For the full year, we're expecting INA to move back into its target margin range and to see continued margin progression in advanced technologies. On the next slide, you can see the bridge to our statutory results. We've made no changes to the definition of adjusting items and most of the non-recurring or exceptional costs here relate to Belfast restructuring and the move of the semiconductor business to Severn Beach, including the sale of the Yatton site, all of which were ongoing at the beginning of the year. We expect all of these projects to have concluded by the end of this financial year. Discontinued operations is reported here on an after-tax basis and includes all transaction-related costs. pre-tax discontinued operations made an adjusted loss of 2.2 million in half one. And then moving to cash flow. Clear the fall in operating profit in the first half has fed through directly into free cash flow generation, albeit an improvement of around 7 million on the prior year. The working capital movement larger reflects the normal shape of H1 and is down on the same time last year. Inventories are higher than the year end, mainly in preparation to execute on the second half order book. We expect working capital to be less of a drag in H2 and we expect cash conversion to return to over 80% for the year. As I mentioned back in June, I think it's worth underlying again the positive cash inflection we see coming next year. Capital expenditure this year is benefiting from proceeds from the YATN sale in August, with underlying CapEx at around 5.5 million in H1. But following completion of Seven Beach, capital expenditure will be lower than recent years, normalising at levels much closer to depreciation. Our structuring programmes will complete this year, meaning exceptional costs are not expected to be material next year. Following engagement with insurers ahead of a policy buy-in, we now expect to make no further payments to the group's defined benefit pension fund in the remainder of this year or beyond. This means a £4 million upside to guidance we gave for FY26 and a further £4 million benefit in both FY27 and FY28. So a £12 million improvement versus our previous expectations for the three years. These, combined with operational cash flow, will have a material effect on free cash flow next year. Our cash balance is strong, ending the half at £45 million after investing £25 million in the share buyback programme and before the receipt of gross proceeds from the nanosites sale, expected to be around £57 million. which then leads me to reconfirm our capital allocation priorities, which have not changed since I presented them in June. Our first priority remains profitable growth, and this is where we will always seek to deploy capital first. We will continue to invest in opportunities to improve productivity, to drive order growth, and to develop new products. We're also committed to our dividend programme, and given our cash balance, the confidence we have in future cash flows, and our strong dividend cover, we've grown the interim dividend again up 6%. Beyond these two priorities, we will look to deploy capital either inorganically, where we see a compelling case to drive growth and returns, or return to shareholders via share buybacks again, where there is a compelling case to do so, which makes sense for our individual shareholders. We are continuing to look actively at inorganic options but with a disciplined approach to ensure any acquisition increases the value of the company. And as I outlined on the last slide, we see cash flow generation to markedly improve as we move into FY27. And so taking into consideration all these factors, we've announced this morning that the current share buyback programme is to be extended by a further £50 million to £100 million, and further details of that will be announced in due course. And then finally, I wanted to summarise some guidance for the rest of this financial year. This has not changed since our October trading update. On a constant currency basis, we expect our imaging analysis division to trade in line with H2 last year, with margin improving in H2 as a result of approximately £4 million of cost benefit, mainly from our Belfast-based business. And as I mentioned earlier, we expect advanced technologies to transition to early teams revenue growth in H2 with a significant drop through benefit to operating profit. These Belfast savings and the operational leverage benefit from a growing semiconductor business give us confidence that we can grow operating profit in the second half on the prior year and finish the year broadly in line with last year, ignoring the impact of currency. Currency is a continued headwind in H2, and in the guidance here we've assumed a US dollar rate of $1.34 for the rest of the year, giving us a headwind for the full year of around $5.5 million. The impact of changes in rates this year will not be very significant, given we are largely hedged for the remainder of the year, but if sterling continues to weaken to the levels we've seen recently, certainly to $1.30 or below, we would not expect to see further FX headwinds in next year's results. And with that, I'll hand back to Richard.

Great. Thank you, Paul. So now I'm going to walk you through some of our progress that we've made on our key strategic actions. This progress is giving us clear line of sight to margin improvement and future revenue growth. I'm going to start with imaging and analysis, the larger of our two divisions. The imaging and analysis division brings together all of our small-scale imaging, microscopy, and camera product lines with similar customer bases and go-to-market strategies. It currently generates around three-quarters of the group revenue and the vast majority of the group's profit, given its very good contribution margins with recent full-year operating margin operating in the range of 22% to 24%. I've already covered the first half disruptions and our actions in response, and we're expecting a much stronger performance in the second half, supported by the self-help actions on cost and efficiency in Belfast and our usual improved H2 seasonality. So let's take a closer look at the three main markets in which we operate. In materials analysis, our products are ideal for analysing the widest range of materials across multiple sectors, And although we started out in academia, we're attracting more commercial customers as companies seek to test properties of new materials and products and to carry out the quality tests and failure analysis on those in production. With the constant demand for better and more sustainable materials, we anticipate a mid single digit growth over the medium term. We also support a strong and growing presence in the semiconductor market where demand has been exceptionally strong in recent periods. We operate right across the life cycle, supporting customers at every stage from academic research to corporate R&D through to packaging, test and failure analysis. Significant long-term investments in security of supply and productivity are driving market opportunity for many years ahead. Our third key market in this division is healthcare and life science. As you know, the global market has been subdued over the last couple of years, following COVID with some customers overstocked. And although demand patterns have remained weak, they have been stable for a few periods now. And we're starting to see some early signs of improvement. With book to bill now above one, order growth in the US and China has returned and we're making positive progress on rebuilding OEM relationships with another key order secured already in H2. As well as being well positioned in our main markets, we're also in a strong position geographically, globally diversified with good opportunity in all regions. In recent years, we shifted the weight of our markets with the US increasing and China reducing, as we followed the best areas of opportunity for the business. At a group level, clearly the short-term demand dynamic has been similar across all markets, but the medium-term opportunities in these three markets are exciting. And with the great products and technology we have in our portfolio, our competitive position, combined with our globally diverse business, we feel we are well placed to take advantage of the opportunities in the future. We've also been agile in responding to the immediate challenges. Given the changing trade and tariff circumstances in Q1, we took a number of specific actions to support customers and improve the resilience of the business. These included making adjustments to a few assembly lines. We accelerated a China for China project that was already underway to meet growing demand for locally produced products. Here, the plan was to produce Oxford Instruments detectors in China, aligned with a number of our electron microscope partners who do the same. Our local team and supply partners successfully shipped our first products made in China for Chinese customers in the summer. And given the uncertain trading relationship between the US and China and the proposed tariff levels, there was a risk to demand on our atomic force microscopes, which are made in California. This was likely to have a sizable impact on this product line. So we swiftly established assembly of AFM products at our VTEC facility in Germany for European and Asian customers. A real achievement because we only started in April and the first products were shipped from Germany last week. Both of these initiatives should add to our competitive advantage as well as protecting and increasing market share. We're also now working on further project to relocate some of our nano indentation production from Zurich to High Wycombe during H2 to capitalise on our capabilities in this excellent facility. And as I touched on earlier, I'm also really proud of the US team's response in such a volatile environment. Bouncing back from the disruption in Q1, 11% order growth at the half year. That growth has been underpinned by commercial customers, notably in semiconductor, which we'll talk more about shortly. And they've also delivered 9% growth in service revenue as we increase our focus on contract sales and improve utilization of our field service engineers. Given the historical performance of Andor in Belfast and the demand environment in life sciences, we spoke about this in June and the need to turn around the business performance. Over the summer, we took the unwelcome but necessary decision to reduce the size of the workforce by 20%. And we will see the financial benefit of that flow into H2. In combination with other cost reductions, we expect to see around £4 million worth of benefit in the second half. We've also continued with our operational programme, which is delivering a 60% productivity uplift on our cameras workstream, reducing lead times and achieving a £4 million reduction in inventory, surpassing our £2.5 million target. We've also reduced the backlog of customer repairs by 30% since January. All of that is helping us to rebuild our partnerships with OEMs. I'm pleased to say we've secured two new OEM positions and one back a third since the start of the year by working closely to really understand the needs and deliver the product development that fits their requirement. Initial but important steps forward. And we're working hard to reinforce the benefits of our leading technology with customers outlining the much stronger operational foundations we now have in place. And finally, the product line restructure we announced in June is complete, enabling us to focus on regaining market share and improving our margins. That is being helped by the launch of a new range of cameras developed by the team in first light imaging that we acquired in 2024. This is just one of the important developments in the imaging and analysis new product lineup. Let's take a closer look at the examples of outputs of our technology investment, which is a key component of our organic growth strategy. New launches so far this year include an extension to our atomic force microscope range, which is entering a new market segment, delivering our typical excellent standard of imaging at a more attractive price point for customers, as well as being much simpler for the non-expert users to operate. We delivered this project in record time for OI, nine months from start to finish. And the second one on the chart is a significantly updated benchtop nuclear magnetic resonance instrument, which has enabled us to regain technology leadership in this space. This new model had an early success and was snapped up by GSK for one of its pharma production sites in the US. The third is that suite of new scientific cameras I just mentioned. And finally, a refresh of our ROM and microscope line, paired with a groundbreaking new spectrometer. Recognising that our market-leading technology is, and always will be, key to our ongoing success, we are committed to a continued investment at our target level of 8-9% of revenue. Let's now turn to our Advanced Technologies division, where we've seen such strong order growth this year. Following the divestment of our nanoscience business, which in accounting terms and the results is held for sale, this division now mainly comprises our compound semiconductor business in Seven Beach here in the UK, making large capital equipment for semiconductor development and fabrication. Though it does also include our much smaller components business, X-Ray Technology in California. In this division, we focused on building the scale of Severn Beach as we move from supporting academia to commercial customers as they develop new chips and establish volume production activity. There is a big opportunity to improve margin as we improve efficiency and grow revenue to more than twice its current scale in the current facility. There is a second half waiting to revenue, fully covered by a strong order book, which will deliver improved margins. As you've already heard, Seven Beach has delivered excellent growth in orders over the half year, trading with strong momentum. So we'll take a look at what's driving that. The business is founded on 40 years plus of expertise in fabrication on compound semiconductor process development. positioning us really well to access the exciting growth potential in the compound semi-market of between 10 to 20%. With the combination of our deep expertise and the significant investment we have made in our new facility at Seven Beach, we've positioned ourselves to target commercial customers developing next-generation technologies, including hyperscale data centres for AI and augmented reality devices. We're gaining traction, delivering 25% order growth in H1, and with a six-fold increase in orders from commercial production customers versus the first half of last year. That's supported by our world-class cleanroom, which is now fully operational, supporting a growing number of customer samples and demonstrations. And this sampling forms an increasingly important part of the sales process, enabling us to work in partnership with commercial customers to develop and refine processes in our new cleanroom. We're also starting to see repeat orders from some of these larger customers, including Coherent, as they expand their data center presence in Europe and the US. As we grow our reach into commercial customers, we're also seeing more large systems and average order sizes increasing as well, as Paul mentioned. And as we grow the business, we're focused on doing so efficiently. The new facility is a great help with that, and we've seen a 12% uplift in labour efficiency so far this year. Our operational excellence programme, which began in Belfast, is also now working at the facility to drive this forward further. And as I've already touched on, our growth is coming from key developments in technology, including AI and related developments in data center, power efficiency, quantum and augmented reality. We have focused our R&D investments in these areas of compound semiconductor technology as we expect them to offer the strongest growth potential. Semiconductors are made up of many layers of materials. Our plasma equipment is used to etch, that is to remove and deposit, to add nanoscale layers of material to give the semiconductors their specific properties, such as greater power efficiency or better optoelectronic properties. These so-called critical layer applications are where we have the most specialised technology, and we can therefore win orders from our target customers and command an improved value. The rapid progress in the AI ecosystem provides us with an exciting opportunity, given our expertise in so many areas that are vital to its success. If I take you from left to right, we all know how important data centres are. Our equipment is used to fabricate the material required for the latest generation of optical laser transceivers and also gallium nitride devices, key to energy efficiency. Then there's also quantum technology development too. Here we're supporting a range of customers, from leading academic institutions to startups, and also some of the world's largest technology companies, as they take this technology from concept to reality. Finally, augmented reality is a further part of the future pathway for the AI ecosystem. And in a particularly nice example of our role, the team are playing in development of the technologies for tomorrow. In the diagram, you can see numerous different processes. We are supporting the development of augmented reality glasses, which we have seen widely reported increase in investment in recent years, notably from the big US technology players. We're excited about the potential for these areas and expect continued growth as these rapidly advancing areas of technology continue. So despite the short-term disruption in H1, we have made good progress across both divisions, all meaning we remain confident we are on track to our medium-term targets set out last year, which you can see on the right. Through swift and decisive action, we've protected our margin structure. As growth returns, we are well positioned for another step towards our 20% plus goal. In imaging and analysis, self-help costs and efficiency will support improvement in H2 and next year. And in advanced technologies, the success of the strategy is evidenced by more commercial customers and a strong order book and opportunity pipeline supporting continued growth in revenue and margins. We're also continuing to invest significantly at the top end of our target range to maintain our technology leadership with new product launches directly from our R&D investment. Cash conversion is expected to return to target levels by the end of the year and with the net proceeds of the sale from nanoscience will boost progress to our return on capital targets. And our balance sheet is strong. The capital allocation priorities mean we have already returned more than £30 million to shareholders. With our forecasts for strong future free cash flow, we have announced today a further £50 million of share buybacks when the current programme completes, taking the total programme to £100 million. So putting the short-term disruption earlier in this year behind us, I'm really pleased with the response from the team and actions on the building blocks to continued progress towards our targets. So to conclude, we go into the second half of the year with an improved position and good execution on strategic actions. I'm really proud of the way the team have stepped up and found positive resolutions to unforeseen external headwinds while we continue to make progress on our priorities. It is a challenging macro environment, but we've been navigating it with agility. That performance and the foundations we're building reinforce our confidence in the ability to deliver an improved performance in the second half, And with great people and fantastic technology, this is a good business and it's improving well as we put ourselves in the best position possible to deliver growth and the benefits of margin and improve value for our shareholders. Thanks very much for your attention. We'll now hand over to the room for Q&A and also online. If you're online, do post your question and we can moderate that after we've dealt with the ones in the room. Thank you.