Oxford Instruments plc

Welcome to the Oxford Instruments full year results presentation. I'm here today with our CFO Paul Fry and thank you for joining us. We're really pleased with these results which cap off a good year and given the headwinds some great outcomes. Clearly a game of two halves, maybe even four quarters and a strong finish while making significant progress with our strategy. All of this puts us in a really good place for the current year and beyond. So first I'll cover the highlights. Paul will take you through the financials and I'll return more on our markets, our strategic progress and look into next year. There will as always be the opportunity for questions at the end, both here in the room and online. We've delivered a really strong performance in the second half and a good full year performance. Paul and I are really proud of what our teams have achieved against a very challenging market backdrop, particularly in the early months of the year, which mostly impacted imaging and analysis, where Q1 orders, to remind you, fell 11%. The year ended strongly, though, slightly ahead of expectations. We saw quarter-on-quarter improvement in order intake, with the second half ending up 8%. Demand in advanced technologies was consistently strong throughout the year, with order intake growth of 28%. Here, we've made significant progress on our shift to serve more high-volume manufacturing customers, which are the source of all the volume improvement. In addition, we received a large multi-year order in the early weeks of the year, supporting even better visibility for FY27. In imaging and analysis, really good operational execution ensured revenue and profit both recovered in the second half and growth returning in H2. The profit improvement was a result of our actions taken to reduce costs in Belfast and wider business efficiencies. Importantly, this meant margins also moved forward towards our targets, up 30 basis points at group level. And for clarity, all the numbers you see here are given at an organic constant currency basis and relate to continuing operations following the divestment of our nanoscience business in January 2026. This was a good deal for a number of reasons. Realising cash that increases our balance sheet optionality, including to invest in our growth and supporting margin improvement for the group, while giving us a sharper focus on the remaining business. So now I'm going to hand you over to Paul to walk you through the detail of the numbers, and I'll be back with some more colour on the significant strategic progress we've made and how we are really well set for the future.

Over to you, Paul. Good. So thank you, Richard, and good morning. So as Richard described, we've delivered a very good four-year outcome after a challenging start to the year where we saw retrenchment in the academic market, especially in the US, and general market uncertainty as geopolitical factors played out. This result has been built on a progressive order intake recovery and imaging analysis and a step change in order book size in advanced technologies. On an organic constant currency or OCC basis, order intake finished up 8% for the full year and up 14% in the second half. Commercial semiconductor customers have been a key driver of order growth across both divisions. As a consequence of the timing of INA order intake recovery and the shape of the advanced technologies order book, revenue recognition lagged behind orders, declining by 3% at constant currency for the full year, a good recovery from the position at the end of the first half. Gross margin has improved as we see the benefits of Belfast restructuring and operational excellence in our imaging analysis division come through and on a constant currency basis margin went forward again by 30 basis points. Cash conversion has also remained strong at 89% and free cash flow has remained robust despite the decline in operating cash flow. And one final point on this slide is to remind you that following the disposal of the nanoscience business in January, we've reported that business as a discontinued operation in both FY26 and restated in the FY25 comparator, with gross margin, operating margin and cash conversion all now being higher in this restated FY25 than they were reported in last year's annual report. Moving now to revenue in more detail, as I described before, the timing of the growth in orders has had an impact on our ability to build and ship within the current year, with revenue growth being highly concentrated in Q4 for both divisions. In the imaging analysis division, we saw revenue decline of 3% for the full year, but saw growth of nearly 2% in the second half as orders steadily recovered through the year. This pattern was more acute in advanced technologies where shipping and revenue recognition was heavily focused in Q4, leaving the year as a whole slightly down on revenue versus the prior year. This advanced technology's revenue shape has been a function of the changing profile of orders in this division towards larger and more complex systems with longer lead times and is where most of the new order growth has come from. These larger orders began to ship in H2 significantly ramping up in Q4 where revenue recognition for the year clearly becomes more sensitive from both customer readiness to receive equipment and our own operational execution and whilst we experienced challenges on both these dimensions in Q4 we've seen some very strong revenue growth so far in FY27 and we expect to report significant growth in this division in the first half. Moving to the next slide, here we give a little more colour on some of the order and revenue dynamics in the imaging and analysis division, which I described earlier. Overall order intake was up 1.9% for the year, with H2 up over 8%, and revenue recovery following in the second half. academia has remained subdued for both divisions, with I&A academic customers orders down around 8%, with non-US academia faring slightly better. However, the main focus of growth has come from commercial R&D, notably in semiconductors, where we see our strategy to capture more growth in this sector playing out well. On the next slide and staying with INA, here we see that despite the decline in the revenue for the year, operating profit moved forward on a constant currency basis and operating margin moved forward on both a reported and a constant currency basis. This is mainly down to the cost benefits restructuring completed in Belfast earlier this year, but also progress on a range of margin improvement initiatives helping to offset inflation. Imaging analysis is a key underpin to the group's performance and it is encouraging to see a very solid recovery here, both in terms of growth and margin. Whilst the macroeconomic environment remains uncertain, we expect this division to be able to deliver low single-digit revenue growth for FY27. On the next slide, we're double clicking on order and revenue dynamics in advanced technologies. As I described earlier, order intake was strong with overall order intake up 28% for the full year, but with revenue growth lagging into Q4. If we look at the sources of these orders on the right here, you can see the significant growth in demand from commercial customers, in particular from high volume manufacturing applications. This growth has been driven mainly by demand for equipment for datacom applications and for applications related to the development of augmented or virtual reality glasses. Order intake has doubled for these two applications versus last year. Focusing on the order book for a moment, our order book on the 1st of April was about 10% below where we opened the prior year. First half order growth helped to replenish this, such that by period 6 the order book was showing growth of around 7%. The second half then saw a significant expansion and we closed the year with an order book 25% higher than at the start of the year. And then following a very sizeable order received in the early part of FY27, we already have an order book that supports the vast majority of our revenue expectations for FY27 with a clear focus now on execution. Moving to the next slide, revenue growth was impacted by some of the dynamics I've already described, but also by the performance of our X-ray tubes business, which sits within the advanced technologies division. Revenue declined in this business where customers' demand has been slow to recover. Revenues from our plasma compound semiconductor business remain broadly flat. Margins were impacted by the contribution drop through from the decline in revenue, but also by the increase in depreciation and maintenance costs associated with the new Severn Beach facility, which became fully operational this year. Looking into FY27, we expect to see and are seeing revenue pull through into this division, delivering high teens revenue growth for the year. This growth will also enable us to make substantial progress towards a 10% to 12% margin range for this division. On the next slide, we've laid out some of the dynamics and adjusted operating margin for the year. As I alluded to at the start of the presentation, following the sale of nanoscience, we've restated FY25 to report nanoscience as a discontinued operation after tax and therefore excluded from operating profit. As a result, when looking at FY25, our adjusted operating margin went from the 16.4% reported in last year's annual report to 17.9% in this year's, an increase of 150 basis points. And then from this higher jumping off point, we've seen the benefits of Belfast playing out, partially offset by the drop through from revenue decline and also the additional Seven Beach costs and advanced technologies. At a constant currency, the net effect was an improvement of a further 30 basis points. Currency again was a headwind in FY26 of around 4.5 million and we see a further headwind of around 3.2 as a consequence of our hedge rates in FY27 being less favourable than our hedge rates in FY26 following broad currency market trends. Setting this currency headwind aside we expect some further progress on margin this year. On the next slide, we detail adjusting items and the impact of discontinued operations. The key point here is that looking forward, we see many of these adjusting items reducing significantly as we embed the transformation and restructuring delivered over the last couple of years. This will have a positive impact on cash and on earnings per share. We also see the tax rate in FY27 stabilising at around 24.5%, which is around 100 basis points below our previous guidance, based on the benefits we're seeing from the UK pattern box arrangements. Moving to cash flow now, we delivered a high cash conversion of 89% despite an increase in receivables following the high concentration of revenue later in Q4. Overall cash from operations was down due to this effect but also from the reduction in operating profit. Free cash flow remained robust as a result of a reduction in cash tax due to overpayments in prior years and proceeds from the sale of YATN. Even without these two items recurring in FY27, we see free cash flow set to improve significantly as adjusting items reduce and pension contributions have ceased following the buy-in in December. This continues to provide us with flexibility to deploy capital in line with the priorities we set out this time last year, which I'll move to now. Organic investment remains our number one priority for the allocation of capital. And in line with this, in FY27, we expect to allocate an additional 10 million of free cash flow to new capital expenditure and capitalise R&D related to some specific growth opportunities. These relate to software and AI development and some of our INA tools, as well as creating solutions specifically for the semiconductor industry. In advance, technologies will be continued to invest to ensure we're able to support the growth of the business and our customers' expectations for our equipment to support future moves to larger wafer sizes. We remain committed to our dividend programme and propose to grow the dividend by 6.3% for the year. And for capital that has remained unallocated after investing in these two priorities, including proceeds from the divestment of nanoscience, we've chosen to make capital returns to shareholders by way of share buybacks. We've announced so far a programme to buy back £100 million of shares, and at 31st March we're about two-thirds of the way through that, and we should complete this programme by the end of the calendar year. And then on the final slide, I wanted to leave you with a sense of the progress that we've made on margin over the last couple of years and the attractive prospects we see for Oxford Instruments to continue this margin journey, but also to capture the significant growth opportunity that our advanced technologies business presents us with. Since FY24, the margin profile of the business has continued to improve through the sale of nanoscience, but also a number of margin initiatives across the business, of which restructuring in Belfast has been the most significant. Against that, we've continued to invest in R&D, with some margin erosion as a result, and some headwind from divisional makes as advanced technologies has grown. Had it not been for over 130 basis points of headwind from FX, we would have been much closer to our target of 20% than our reported margin today. However, with the steps we're taking and the operational leverage benefits of growth, we remain confident that 20% is achievable over the medium term. Revenue growth will be an important factor in delivering this target, and here we can draw confidence from both the momentum we've regained in the second half of this year in both divisions, but also the accelerating order book and opportunity pipeline we see in our advanced technologies division, which Richard will describe later. And taken together, we believe this represents an attractive growth and margin profile for the company over the medium term. And with that, I'll hand back to Richard.

Great, thanks, Paul. So this is a very different business than the one I joined in 2023. And it's just over two years since launching our new strategy. We've always had a strong reputation for innovation. And we continue to invest significantly to maintain and improve this differential advantage. But we weren't as strong as we should have been commercially and the business was too complex and not always executing as well as it should. So we focused on fixing that to transform the business overall. We've simplified and sharpened up our operations. It's made a big difference internally and externally to restructure the group into two operating divisions, imaging and analysis and advanced technologies. We've reshaped the product portfolio, improved customer intimacy, and our after sales service, and put the business onto a much stronger commercial foundations. We've also made a step change in free cash flow, and it's been great to have Paul working alongside me as CFO since last April to accelerate the transformation of Oxford together. We're now a simpler business and are creating more value from our investments in future growth and operating effectiveness. all of which puts us in a good position for more growth and further margin improvement in the future. During this last year, we've refocused the portfolio, divesting our nanoscience business, having returned it to profitability. We generated net proceeds of 42 million pounds. Importantly, though the divestment also frees up management time, it improves the rigor and optionality in our capital allocation and investment. Our £75 million investment in a new compound semiconductor processing equipment factory, the benefits of which are becoming abundantly clear. With order intake up 28% year on year as customers seek out unique precision capabilities in this specialist field to accelerate their progress. We're successfully pivoting to commercial customers in this business who now represent 63% of all orders. The group structure has been simplified and is now much more efficient. We run all imaging and analysis product lines under a single leadership group and we have generated meaningful cost efficiencies, delivering over 165 basis points of margin improvement and enacting a step change in free cash flow of over 18 million pounds. A critical area has been the restructuring of our Belfast business, both in terms of product strategy, new camera investments and the cost base. This, coupled with the operational improvements, has delivered £6 million of cost savings that helped improve margin and supported some new customer OEM wins, which I'll come back to shortly. And across the group, we've got much closer to our customers, investing in sales and service. Having identified in 2024 that we were not maximising our opportunity to generate service revenues, I'm pleased to report that this now constitutes 19% of the group, up more than 300 basis points. Oxford Instruments now has stronger foundations, it's more effective, more agile and more customer focused, generating good financial outcomes and well positioned for the future. Turning to our markets and the current dynamics, we continue to focus on three core markets, which all have strong structural growth characteristics. In materials analysis, our products are used for precision analysis of metrology of almost every type of material. We see continued attractive structural growth in the mid-single digit range over the medium term as electrification supports sustainability and energy security, and companies look to deploy more sustainable materials. We're seeing exceptionally strong demand in the semiconductor market, and as a reminder, both divisions have opportunity in the semiconductor market, but the majority, around two thirds, comes from our higher growth, new compound semiconductor technologies. Here, the driver right now is not just the exponential growth arising from AI, but electrification and power present further key opportunities as well. Demand is clearly currently stronger than our median-term growth rate, as demand for data centre and optics is accelerating. And finally, healthcare and life science. As you know, the global market has been subdued over the last few years, but we see good long-term growth drivers as academic researchers and pharma companies look to address an ageing population. Here we saw the early signs of recovery. We signalled that the half-year continued. booked a bill finishing at 1.03, giving some confidence in a recovery in the year ahead. This chart, with a couple of changes that I will explain, should remind you all of the way we position ourselves strategically and align with customers that support long-term growth for OI. Our heritage is in academic research, shown here as Explore. which still represents around 35 to 40% of our business as we partner with academic institutions all over the world to accelerate fundamental research. This gives us incredible insight into long-term technology trends that help us shape our own technology and product investment. We then work with customers in the commercial and OEM space as they translate this academic research in the real world setting. This segment, which we characterise as develop, in the middle represents a further 35 to 40% of Oxford's business. And then finally, produce. A key part of our strategy, especially in advanced technologies, has been to expand our customer base in volume production. Ideally, this gives us the opportunity to commercialize our technology into faster growth areas, providing more volume potential for OI. And here we're making real progress with demand from production customers up 34%. This has resulted in the percentage of group turnover from production customers increasing from 18% to 25% at the end of FY26. Additionally, we're seeking to grow our revenue from after-sales service, also gaining some traction. Service revenue is now 19% of the group versus 15% to 16% three years ago. Here, we are investing in cross-training, local repair centers, and improved logistics to generate better customer outcomes. So moving on now to our divisions, I'm going to begin with imaging and analysis. The division has delivered a really resilient performance in FY26 and I'm extremely proud of how the teams have dealt with everything that's been thrown at them. Over the next few slides, I'm going to walk you through the story of the year, beginning with the disruption in H1, the major restructuring in Belfast, investments in the front end of the business, and the investment progress and plans in products and technology. All of this has contributed to 120 basis points of margin progression. So let's take a closer look. In the early months of H1, we repriced our open order book to address tariffs, mitigating the direct impacts. We also adjusted some of the product assembly, notably accelerating our China for China project to meet growing demand for locally produced products. We shipped the first products made in China for Chinese customers in the summer. And we also took rapid action to protect the sales of atomic force microscopes, which are produced in California amid the uncertain trading relationships between the US and China. And we moved some of the assembly of AFM products to our own facility in Germany for European and Asian customers. Export controls and rare earth minerals led to a short term squeeze in supply of magnets widely used in our INA product range. Our team rapidly created new engineering solutions, secured alternative sources of supply, which will have a long-lasting positive impact on our resilience. And the final key external challenge we faced in the year was in relation to US academic funding, which faced significant uncertainty for a number of months as the US administration attempted to drive forward significant budget cuts. In the end, overall budgets remain broadly intact, but there still remains a challenge as customers continue to experience funding delays. But our US team has been proactive in helping customers seek new funded opportunities and working to add commercial customers to offset. As we discussed at the interims, one of the important actions we've taken to support growth and margin improvement in the year was the restructuring of our Belfast business. The business has felt the impact of the weakness in healthcare and life science in recent years and was also struggling operationally. We took the difficult decision to reduce our workforce by 20%, which, alongside further operational efficiencies, removed £6 million from the cost base of the business. The team have also successfully reduced inventory by more than double our original £2.5 million target. All of this supported strong H2 recovery as these benefits came through. We've also put a new leadership team in place to drive the transformation, notably focusing on realigning our product strategy towards higher contributing lines, particularly with OEM partners. Early outcomes are encouraging, with increased OEM orders, new product positions secured, and discussions underway for further OEM business. And our operational transformation in Belfast continues, with sustained productivity improvements, 30% reduction in repair times and repair backlogs down 50%. Back on a stronger footing, we're now investing for future growth, including a full clean room upgrade, which was carried out in April this year. And with book to bill at 1.05, we are moving into FY27 in better shape with growth prospects for this business. One of the very important pillars of our strategy is to significantly enhance our customer interface and improve the customer journey. We've invested in new demonstration centers in South Korea and Taiwan, taking our global total to 11. The ability to demonstrate our solutions locally has an important impact on our order conversion rate, as customers see our technology in action. This will continue to be a focus area for organic investment in the year ahead. We're cross-training our sales teams to cover a wider range of products where practical, driving efficiencies and improving the ability to cross-sell across our portfolio. And the service level actions have seen a direct correlation to Net Promoter Score improvements to a record 84% in China and up from 42 to 70% in the US. a real positive shift in customer sentiment and we expect to see similar improvements in our Asia and European regions as these new structures mature. Another pillar of the strategy we set out in 2024 was a commitment to invest 8-9% of group revenue annually in R&D, ensuring this spend is more commercially focused and in the best places for growth. This year we've launched a number of new products, some of which you can see on the slide. I won't go into detail as we covered these at the interims, but suffice it to say they're all designed to provide customers with the very latest advanced capabilities while being increasingly easy for non-expert users to operate. Given the strength in group performance, the improvement in cash flow and margins, we plan to increase our investment in the next year or so. This focus will be to capitalise on the opportunity we believe exists in the semiconductor space and to enhance our software with additional AI integration, all ensuring we stay one step ahead. Additionally, we were launching a new camera range in our Belfast business, the first for a number of years and key to our OEM strategy. So lots to go after in FY27 in imaging analysis and some really great progress right around the division which has underpinned the strong performance. Now let's take a closer look at advanced technologies. It's also easier to see the strategic growth opportunity as a simplified standalone division. When we set out the strategy in 24, we could see a big potential in compound semiconductors, but still had a lot of work to do to realise the success. And we had a challenging situation to deal with in our nanoscience quantum business. We characterised the division as fix, improve and grow. Since then, we returned nanoscience to profitability and in January we divested it, delivering good value to shareholders and improving group margins. It also means we can now fully focus on the opportunity in compound semiconductor from our new site at Severn Beach. And now that the vast majority of this division is driven by our growth strategy in compound semiconductors, I think it's helpful to remind you of where we're positioned, our differentiation, our current significant drivers of growth in order intake. Given this progress, we feel we've now moved on from the fixed phase to one where we're looking to grow strongly and deliver the potential of the business. As a result, we're now lifting our margin targets in this division to 12 to 15%, as we feel over the medium term, we are now in a position to take the business into the mid-teens. Looking at the history of the plasma journey, Oxford acquired plasma technology, semiconductor business in 1990. And how we have morphed now from the intellectual to the commercial. Historically, the business was focused on academic customers, gaining really valuable experience understanding the potential of compound semiconductors. In the last decade, the team worked to move the business to establish some positions with commercial customers as well. Our recent effort has been to try and build on this and pivot to high volume production customers to give greater growth potential. We invested, as you know, in the state of the art production and development facility in Seven Beach in Bristol. We've moved in and got the business fully operational. And crucially, we stayed focused on key market segments where we believe our technology provided good growth opportunity, such as data comms, power devices, micro LED, and augmented reality, where we know we can add value for our customers. So let me explain where we sit in the value chain. The production of a semiconductor wafer begins with the bull growth, shown here on the left. The bull is then sliced into multiple wafers, and we operate in the next stage, front end processing. This is the most capital intensive part of the process, accounting for around 65% of total capital investment. We offer a broad range of front end technologies, depositing material onto the wafer or etching into its surface. After this, the devices are diced and individual chips are created before being packaged. The exciting developments in the compound semiconductor market are a result of a number of years of research and technology development, exploring how new compounds on silicon can generate devices with new capabilities to solve some of today's challenges. They're enabling devices to have greater switching speed, power efficiency, and better performance than is possible with traditional silicon devices. A great example today being the laser devices fabricated from indium phosphide, important to the build-out of today's data centres. Oxford Instruments has critical processing technology being used in the development and manufacture of these new compound semi-devices. And today, clearly, we're achieving exciting growth. Orders are up as a result of our strategic positioning and the technology and our improved commercial approach. So here, I wanted to highlight a few of the current areas that are some of the larger drivers of the activity. And as we've consistently said, we're trying to ensure we are not dependent on any one area of the market. So firstly, in Datacom, as semiconductor customers address significant demand for data to support AI applications, the market is in the production ramp-up phase. with customers using our equipment to fabricate laser transceivers for the expansion of data centres. Significant capex has been committed and indium phosphide laser chips are a critical enabler of the infrastructure. Gallium nitride is used to create high efficiency, low thermal load devices for onboard automotive charges, consumer devices and also efficient power supply for AI servers. This market is in the positioning phase as customers use single systems in pilot production to prove out the technology. And then in micro LED, here we are partnering in corporate research as companies explore new capabilities for display applications where high brightness and small pixel size are required. The image projection on augmented reality glasses is a good example of this. Here, customers are using our systems to develop and prove applications that will later move into pilot production. So our 40 years of know-how, combined with extensive IP in our part of the value chain, puts us in a good position to demonstrate our capability with volume customers. On the left-hand side of the chart, you can see some examples of our customer positions. Coherent, who are deploying our equipment in their data center growth in Europe and the US. And Roam in power electronics, where our atomic layer etch technology is enabling them to take gallium nitride power device manufacturing in-house and scale to 200 millimeter wafers. And bottom left, Rigetti, who have just deployed one of our atomic layer etch systems in their dedicated quantum fab in California. In augmented reality applications, we're helping household names to test their prototype glasses. We're active in all four market areas with big names, including the likes of those you can see at the bottom of the slide, some of whom who are our customers. And what's attracting customers like these is our patented precision capabilities, which produce smoother, higher quality surfaces and structures and boost productivity by creating uniform films at higher speed and enabling more good wafers per day at a lower cost than our competitors. These patented capabilities are underpinned now by our state-of-the-art facility, increasing focus on tailored service packages and our full suite of metrology capabilities from our imaging and analysis division. There's a really exciting growth opportunity ahead for us and with the revenue materially covered for the whole of FY27, we expect to see good progress and continued order growth in the coming year ahead. So to conclude, we've had a really strong year in a challenging set of circumstances, not just results, but strategic progress. We've shown real agility in our response, executing well across both divisions, alongside embedding structural change and laying the foundations for a return to growth in Belfast. We have a considerable and exciting market opportunity in advanced technologies facilitated by the strategic shift we've made to invest at Seven Beach and focus on pivoting to high volume production customers. Oxford Instruments is in great shape. Our structure, operations, market positioning and balance sheet are fundamentally stronger than they were in 2024 and it's clear in the results that we've achieved this year. I'm incredibly proud of the team's progress we've made towards our medium term targets since we set them out just two years ago. We're entering FY27 in a strong position and I'm confident in our ability to continue to deliver growth and value to our shareholders in the coming year and beyond. So with that, thanks very much for your attention and we'd be very happy to take some questions in the room and if you've got them online, please do fire them in and we'll moderate those in the room here. Okay, thank you. Andrew, yeah.