Renishaw plc

Good morning, everyone. My name is Chris Pockett and I'm head of communications for the Renishaw Group. And I would like to welcome you to this live webcast presentation of Renishaw's preliminary financial results for the year ended June 2022. Before we start today's event, I would like to read a short statement on behalf of the company. We are deeply saddened by the passing of Her Majesty the Queen and we would like to offer our condolences to her family and friends at this very difficult time. She was a remarkable woman whose hard work, dedication, compassion and integrity over more than 70 years of service shone through and gained a huge respect around the world. Rest in peace, Your Majesty. Today's presenters are Will Lee, Chief Executive, and Alan Roberts, Group Finance Director. Before I hand over to Will, I would like to go through some basic housekeeping for the event. After the presentation, which will last around 25 minutes, Sir David McMurtry, Executive Chairman, will join Will and Alan for a question and answer session in which we will try to answer as many questions as possible before we close at 11 o'clock. No questions will be answered during the formal presentation. However, you will be able to submit questions both during and after the presentation via the question icon that you can see on the control panel on the right of your screen. I should also point out that all financial information given during this presentation will be in pound sterling. Thank you again for joining this webcast event and I will now hand over to Will.

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

Thank you, Will, and good morning, everybody. As Will has already stated, we have delivered a very strong performance this year, resulting in record revenue and record adjusted profit before tax. Meeting this strong demand has been a real challenge given the global supply chain pressures we've seen, and I would like to thank our people for their continued dedication to meeting our customers' needs. Revenue amounted to $671.1 million compared to $565.6 million last year, an increase of 19% or 18% of constant exchange rates. Adjusted profit before tax is $163.7 million, 37% up from $119.7 million last year. This is mainly as a result of additional gross margin from revenue growth. However, we have seen an impact on our costs from inflationary pressures, particularly labour and utilities, and there's more on this later. This gives a return on revenue of 24% compared to 21% for the previous year. Adjusted profit before tax is one of the key performance measures used by the board to monitor the underlying trading performance of the group, and the following items are excluded from adjusted profit before tax. Losses of $8.3 million from forward contracts, mostly US dollar denominated, which are deemed ineffective for cash flow hedging, compared with gains of $22.9 million in the previous year. The movement has been caused mainly by the weakening of sterling against the dollar. These gains and losses have had no impact on our cash balances and no additional contracts have been designated as ineffective this year. an £11.7 million past service costs relating to the UK defined benefit pension scheme, and more on this shortly, and a credit of £1.9 million for the third party advisory fees relating to the formal sale process and the release of provisions for restructuring made in our financial year 2020. The resultant statutory profit before tax was £145.6 million, compared to 139.4 million last year. The effective tax rate for the year is 17.3% compared to 20.1% in the previous year. This reduced rate mainly rises from the impact of the profit split by country and different tax rates in those countries, an increase in the patent box and CapEx super detection incentives in the UK and an increase in the profits from associates and joint ventures which are reported net of tax within the profit before tax. Earnings per share on an adjusted basis is 185.5 pence, an increase of 41% compared with last year, and on a statutory basis is 165.4 pence up from 153.2 pence last year. In line with our progressive dividend policy, the Board has proposed a final dividend of 56.6 pence per share, giving a total dividend for the year of 72.6 pence per share, a 10% increase over last year. Returning to pensions. The company and trustees have successfully implemented a number of changes to the UK defined benefit pension scheme during the year. Following the Queen's Council opinion received last year, mainly relating to how revaluation and late retirement factors are applied, the liabilities of the scheme reduced by £14.3 million last year with a credit reported in the other comprehensive income and expense. This year, the scheme rules have been changed to align with the historic administrative method for calculating the revaluations and early retirement factors. The resulting increase in liabilities, totalling £11.7 million, has been recognised as a past service cost in the consolidated income statement. This cost has been excluded from the adjusted profit before tax. We also agree that the company will have the unconditional right to a refund of any surplus on wind-up of the scheme, allowing for the recognition of 40 million IS-19 scheme surplus this year. Following the agreement of the September 21 actuarial evaluation, the £10.6 million held in escrow as security has now been released from charge. In addition, the net book value of UK properties subject to charge has reduced from £81.7 million last year to £54.2 million this year. This slide presents details of our income statement and the profit bridge shows the movements that reconcile the adjusted profit before tax of $119.7 million for last year to the $163.7 million this year. We have seen a $66 million improvement in gross margin, excluding engineering costs, which is attributable to the increase in revenue. Our gross margin of 35% of revenue is in line with the previous year. However, we have seen an increase in the cost of a number of purchased items, particularly electronic components, aluminium and steel, and an adverse currency impact. These have been offset by improved efficiencies resulting from higher production volumes and process improvements. The group headcount has increased to 5,097 at the end of June 2022, compared with 4,664 at the end of June 2021. The increase mostly comprises manufacturing staff to ensure we have sufficient capacity to meet demand and also an intake of 145 graduates and apprentices continuing our investment in future talent. Labour costs, including bonus provisions, were £254.4 million, an increase of 14% versus last year. This has been driven by an average headcount increase of 11%, plus salary review and performance-related bonus increases. We remain committed to our long-term strategy of developing new innovative and patented products to create strong market positions with net engineering costs of £78.6 million compared to £72.1 million last year. Gross engineering expenditure increased by 12% to $85.8 million. This total expenditure was consistent with our plans, but we spent more than originally planned on existing product support, with the need to redesign a number of existing products to maintain supply to our customers. As a result, our $59.4 million expenditure on new products was similar to last year. We have also experienced an increase in other overhead costs, including higher utility costs due to rising energy prices and higher usage, and other third-party administrative costs due to current inflationary pressures. Distribution costs have increased by 12.4 million this year, including 2.1 million of impairments following the cessation of our operations in Russia. An increase in travel and exhibitions as some restrictions relating to the pandemic have been lifted. Adverse currency impacts, particularly from the weakening of sterling against the dollar. and increased labour costs following pay reviews and performance-related bonuses. Within administrative costs, we incurred 3.7 million last year nil of expenditure on services relating to the implementation of a group-wide ERP software package. In the previous year, administrative costs included 4.7 million of impairments relating to an associate company, which have not been repeated this year. Profits from associates and joint ventures has increased by 2.7 million, primarily due to strong demand for the magnetic encoders designed and manufactured by our RLS based in Slovenia. Looking forward, as a result of benchmarking other pay reviews already completed and excluding other factors such as headcount growth, we expect annual labour costs to increase by around £19 million in 2023 compared with this year. Where possible, we are mitigating cost inflation by increasing the sale price of our products and are focused on delivering productivity improvements across the business. Moving on to capital expenditure. Of the 30.8 million expenditure in the year, 25.1 million related to plant and equipment, primarily to support our manufacturing processes and IT infrastructure, and 3.7 million on property for the completion of our new distribution facility in South Korea, providing demonstration capability for our products, in particular capital goods products. Looking forward we have commenced the expansion of our production facilities at the Miskin site in South Wales to support future business growth. The committed spend is around 64 million of which over 30 million is likely to be incurred in the financial year 2023. On the slide you will see the latest progress on the development of the site. We are also planning significant investment in production equipment to increase both capacity and productivity with a focus on automation and further investment in our IT systems and group-wide ERP systems. Turning to cash flow, this bridge tracks the movements from our opening cash and bank deposits balance of $215 million at the 1st of July to the closing position of $253 million at the 30th of June. before non-cash items and research and development costs gave a cash inflow of $254 million. We have seen a net $48.8 million cash outflow from changes in working capital, primarily relating to an increase in inventory levels of $48.9 million. This reflects increases in global demand and planned uplifts to strategic safety stock levels to mitigate global supply shortages. Significant cash outflows relating to our capital allocation strategy include 59.4 million of R&D costs, 31 million of CapEx, including intangibles, and 49.5 million of dividends paid. Other significant cash outflows include £23.4 million of tax payments and £8.9 million of pension scheme funding. Our strong cash position leaves us well placed to invest in the infrastructure needed to meet our future growth plans. I'll now hand back to Will.