Renishaw Regulatory News (RSW)

Renishaw plc

6 February 2024

Interim report 2024 - for the six months ended 31 December 2023

Highlights

A solid performance in challenging market conditions with growth opportunities in H2

· Revenue 5% lower at £330.5m:

? Manufacturing technologies revenue lower by 6%, with solid growth in Industrial Metrology offset by continued weak demand for position encoders for semiconductor manufacturing equipment.

? Analytical instruments and medical devices revenue up 16%, with strong growth in Spectroscopy products.

? Group revenue lower by 2% at constant currency; APAC +6%, EMEA -6% and Americas -13%.

? Q2 similar to Q1 this year and Q2 FY2023; stable order book.

· Adjusted* profit before tax of £56.5m (H1 FY2023 £73.5m):

? Represents 17% of revenue (21% last year).

? 3% reduction in gross margin before engineering costs: targeted price rises, offset by adverse currency impact on revenue, employee pay inflation, and lower production overhead absorption due to planned inventory reductions.

? Cost control in engineering, distribution and administration limiting year-on-year increases to 3%.

· Statutory profit before tax of £56.5m (H1 FY2023: £77.8m).

· Strong balance sheet with cash and cash equivalents and bank deposit balances of £178.3m, compared with £206.4m at 30 June 2023, with the £43.2m final dividend for FY2023 paid in H1.

? Targeted reductions in inventory contribute to cash flow from operating activities increasing to £55.6m (H1 FY2023: £21.6m).

· Interim dividend of 16.8p per share.

William Lee, Chief Executive, commented:

"We have achieved a solid performance in challenging market conditions, with growth from Industrial Metrology products in APAC being offset by continued weak demand from some key sectors, most notably semiconductor equipment. We expect an improvement in our trading performance in the second half of the financial year as market conditions improve, and as we continue to pursue a range of growth opportunities. To support our through-cycle growth strategy, we are continuing to focus on productivity and to make targeted investments in our people, our production facilities, and our new product pipeline."

* Note 12, 'Alternative performance measures', defines how adjusted profit before tax and adjusted earnings per share are calculated.

About Renishaw

We are a world leader in measuring and manufacturing systems. Our products give high accuracy and precision, gathering data to provide customers and end users with traceability and confidence in what they're making. This technology also helps our customers to innovate their products and processes. We are guided by our purpose - Transforming Tomorrow Together. This means working with our customers to make the products, create the materials, and develop the therapies that are going to be needed for the future. Our vision is to innovate and transform the capabilities of our customers and end users through unparalleled levels of precision, productivity and practicality.

We are a global business, with customer-facing locations across our three sales regions; the Americas, EMEA, and APAC. Most of our R&D work takes place in the UK, with our largest manufacturing sites located in the UK, Ireland and India.

Results presentation and live Q&A session today

See below a video presentation of these results, presented by William Lee, Chief Executive, and Allen Roberts, Group Finance Director. There will be a live audio-only question and answer session with William and Allen at 10:30 GMT today. Details of how to register for and access this webcast are available at the following link:

https://www.renishaw.com/en/register-for-the-2024-interim-results-webcast--48539

Questions can be submitted during the live Q&A session using the webcast platform or in advance to communications@renishaw.com (please submit by 09:30 GMT).

Enquiries: communications@renishaw.com

Overview for the six months ended 31 December 2023

Revenue

Revenue for the six months ended 31 December 2023 was £330.5m, compared with £347.7m for the corresponding period last year. Manufacturing technologies revenue was lower by 6%, with solid growth in Industrial Metrology offset by continued weak demand for position encoders for semiconductor manufacturing equipment. Analytical instruments and medical devices revenue was up 16%, with strong growth in Spectroscopy products. Overall, revenue in Q2 FY2024 was similar to the corresponding period last year and marginally above Q1 FY2024. The order book at 31 December 2023 was similar to that at 30 June 2023.

At constant currency, revenue was lower by 2%. APAC revenue was up 6%, with strong growth in Industrial Metrology offsetting continuing weak demand from semiconductor equipment manufacturers. EMEA revenue was lower by 6%, with strong Spectroscopy sales, but weaker demand for Position Measurement and Additive Manufacturing products. Americas revenue was lower by 13%, with growth in metrology systems offset by weaker sales elsewhere, but an improved order book.

New product introductions and commercialisation

Since June, we have launched new products including the HPMA-X tool setting arm for large CNC lathes and RMP24-micro, the world's smallest wireless machine tool probe. The latter is designed for manufacturers of high-precision miniature components such as those found in the medical, watchmaking and micro-mechanics industries. At the Formnext exhibition in November, we launched two new products for our additive manufacturing (AM) product line. TEMPUS? technology enables lasers to fire at the same time as a machine's recoater is moving, substantially reducing build times. The new RenAM 500 Ultra system includes this new technology, plus advanced process monitoring software, with the aim to reduce cost per part which is vital to the wider adoption of AM technology.

During the period we have also continued the global roll-out of Renishaw Central, our smart manufacturing data platform that collects, presents, and actions accurate process and metrology data. Our new industrial automation product line, which aims to transform the process of commissioning and servicing of industrial robots, has also achieved some early adopters, including a global aerospace company.

Operating costs

We have continued to take a cautious approach to recruitment during the year, and our total headcount of 5,166 is similar to 30 June 2023 and 31 December 2022. We have continued to invest in our early careers programmes, whilst we have undertaken a targeted mutually agreed severance scheme in the UK to allow employees to voluntarily leave the company. We have made major investment in employee remuneration in recent years to ensure competitiveness and retention of highly skilled and trained employees, resulting in employee turnover being consistently below target. Labour costs (excluding bonuses) have increased by 2.4% to £136.5m for the period, primarily reflecting the January 2023 pay review and nearly £1.9m of payments relating to the mutually agreed severance scheme.

We have controlled engineering, distribution and administration costs, limiting the year-on-year increase to 3%. This includes an increase in third-party support costs in relation to our new global ERP system (Microsoft D365). We successfully completed the first implementation during the period, and the roll-out of this system will continue over the next few years.

Our gross margin (excluding engineering costs) for the period was 61% of revenue, compared to 64% over the comparable period in the previous year. This change is partly due to a lower recovery of production overheads this year, as we have targeted inventory reductions, whilst retaining manufacturing resource in expectation of demand increasing in the second half of the financial year. Currency rate changes have also had an adverse impact on the gross margin. The effect of these has been partially offset by further targeted price rises.

We remain committed to our long-term strategy of developing innovative and patented products to create strong market positions. During the first six months of this year, our gross engineering spend, including research and development, increased by 2.4% to £51.5m. Net engineering spend includes a £1.5m year-on-year increase in the R&D tax credit, primarily as a result of the rate applicable to qualifying spend increasing from 13% to 20%.

Profit and tax

Adjusted* profit before tax for the period was £56.5m (17% of revenue) compared with £73.5m (21% of revenue) last year. Statutory profit before tax for the period was £56.5m, compared with £77.8m last year. H1 FY2023 included a £4.4m fair value gain on financial instruments not effective for hedge accounting and not included in adjusted profit before tax. No forward contracts have been designated as ineffective since FY2020.

Financial income for the period was £7.2m compared with £5.0m last year, and includes a £2.2m increase in interest on bank deposits.

The income tax expense in the Consolidated income statement has been estimated at a rate of 20.1% (H1 FY2023: 17.7%) and is based on management's best estimate of the full year effective tax rates by geographical unit applied to half-year profits. This is comparable with the 20.0% achieved in FY2023.

Adjusted earnings per share were 62.1p, compared with 83.4p last year. Statutory earnings per share were 62.1p, compared with 88.1p last year.

Manufacturing technologies

Revenue for this segment, which comprises our Industrial Metrology, Position Measurement and Additive Manufacturing businesses, was £311.1m for the first six months, compared with £330.9m last year. We achieved solid growth in our Industrial Metrology business, with notable growth in demand for our gauging system and machine tool probing product lines, particularly from the consumer electronics sector in APAC. In our Position Measurement business, we have continued to see weak levels of demand for optical encoders from semiconductor manufacturing equipment builders, however, we remain optimistic about the through-cycle growth opportunities in this important sector. In Additive Manufacturing, whilst revenues were below the same period last year, we are seeing repeat demand from a growing number of customers, and we entered the second half with a strong order book. Adjusted operating profit was £46.0m, compared with £66.8m for the comparable period last year.

Analytical instruments and medical devices

Revenue from this segment for the first six months was £19.4m, an increase of 16% compared with £16.8m last year. There was strong growth for our Spectroscopy products, particularly the EMEA region. We continue to see growing demand for the Virsa? analyser, a portable system that allows sample analysis outside of a laboratory, and the inLux? SEM Raman interface which allows simultaneous Raman and scanning electron microscope imaging. Our neurological business is continuing to progress opportunities with pharmaceutical companies to use our drug delivery technology for clinical trials. The adjusted operating profit was £1.2m in the first half of this year compared with £0.1m for the comparable period last year.

Balance sheet

Cash and cash equivalents and bank deposit balances at 31 December 2023 were £178.3m, compared with £206.4m at 30 June 2023, primarily reflecting the cash generated from operating profit of £55.6m, less capital expenditure of £40.4m, and the final dividend payment of £43.2m in respect of FY2023. Capital expenditure mostly relates to the expansion of our manufacturing facility in Wales, and we expect capital spend for the full year to be similar to last year.

We have reduced our inventory balances by £11.4m since 30 June 2023, largely reflecting targeted reductions in components and sub-assemblies for our optical encoder products as supply chains have normalised. Trade receivables have decreased by £7.1m in the same period, with receivables days improving by 3 days since 30 June to 61 days, and no significant movement in expected credit losses. The planned reduction in inventory has contributed significantly to an increase in the cash flows from operating activities compared with the corresponding period in the previous year.

During the period, an insurance buy-in of the UK defined benefit pension liabilities was successfully completed. This mitigates the majority of funding risk going forward. See note 11 for further detail.

Dividend

The Board has approved an interim dividend of 16.8 pence net per share (FY2023: 16.8p), which will be paid on 9 April 2024 to shareholders on the register on 8 March 2024.

Principal risks and uncertainties

The Board has considered the risks and uncertainties which could have a material effect on the Group's performance and position. While we continue to monitor developing geopolitical tensions, the overall impact and likelihood of our principal risks is not considered to have changed significantly. This conclusion also reflects the mitigation undertaken by the Group in response to these risks. The principal risks and uncertainties set out on pages 52 to 59 of the 2023 Annual Report therefore remain relevant.

Sustainability

We continue to make strong progress towards our target of Net Zero for Scopes 1 and 2 emissions by 2028. We self-generate 11% of our electricity consumption and by the end of 2024 all the electricity that we purchase globally will meet our sustainability requirements. During the period, we have contracted with a green-energy provider to supply our main UK sites with 100 per cent renewable electricity.

We see significant commercial opportunities arising from the drive to Net Zero. Our customers are setting sustainability targets and the products we supply them help to increase their manufacturing efficiencies by reducing energy consumption and waste, and also improve the performance of the products they supply to their own customers.

The company has formalised the management of sustainability, including climate-related financial disclosures, through a new ESG Steering Committee, chaired by William Lee, with oversight provided by one of our Independent Non-executive Directors. With the support of specialist advisors, the Committee is developing a comprehensive ESG strategy which will be published in this year's Annual Report.

Directors and employees

The Directors would like to thank our employees for continuing to drive us forward towards our vision to innovate and transform the capabilities of our customers.

Outlook

The Board remains confident in our organic growth model, built on solving customer problems with innovative products, global service and world-class in-house manufacturing. Whilst we operate in cyclical markets, we aim for high single digit average organic growth rates through the cycle. 

We have achieved a solid performance in challenging market conditions, with growth from Industrial Metrology products in APAC being offset by continued weak demand from some key sectors, most notably semiconductor equipment. We expect an improvement in our trading performance in the second half of the financial year as market conditions improve, and as we continue to pursue a range of growth opportunities. To support our through-cycle growth strategy, we are continuing to focus on productivity and to make targeted investments in our people, our production facilities, and our new product pipeline.

At this stage we expect full year revenue to be in the range of £675m to £715m. Adjusted profit before tax is expected to be in the range of £122m to £147m.

* Note 12, 'Alternative performance measures', defines how revenue at constant exchange rates, adjusted profit before tax, adjusted operating profit and adjusted earnings per share are calculated.

Consolidated income statement

Consolidated statement of comprehensive income and expense

Consolidated balance sheet

Consolidated statement of changes in equity

Consolidated statement of cash flow

Notes

1. Basis of preparation

The Interim report, which includes the condensed consolidated financial statements for the six months ended 31 December 2023, was approved by the Directors on 6 February 2024.

The condensed consolidated financial statements for the six months ended 31 December 2023 were prepared in accordance with International Accounting Standard 34 'Interim Financial Reporting' (IAS 34) as issued by the International Accounting Standards Board and as adopted by the UK. These apply the same accounting policies, presentation and methods of calculation as were applied in the preparation of the Group's consolidated financial statements for the year ended 30 June 2023, except for income taxes which are accrued using the forecast tax rate for the financial year, and except for the adoption of new accounting standards.

The condensed consolidated financial statements included in this Report have not been audited and do not constitute the Group's statutory accounts as defined in section 434 of the Companies Act 2006. The information relating to the year ended 30 June 2023 is an extract from the Group's published Annual Report for that year, which has been delivered to the Registrar of Companies, and on which the auditor's report was unqualified and did not contain any emphasis of matter or statements under section 498(2) or 498(3) of the Companies Act 2006.

Going concern

The Directors have prepared the unaudited interim financial information on a going concern basis. In considering the going concern basis, the Directors have considered the previously mentioned principal risks and uncertainties, as well as the Group's current trading performance and updated cashflow forecasts. The Directors have also considered the financial resources available to the Group, with net current assets of £448.6m at 31 December 2023 (compared to £470.8m at 30 June 2023), including £178.3m cash and bank deposits at 31 December 2023.

We have updated our reverse stress testing to identify what would need to happen in the period to 28 February 2025 for the Group to deplete its cash and cash equivalents and bank deposit balances. This identified a trading level so low (significantly below FY2023 revenue) that the Directors feel that the events that could trigger this would be remote. The Directors also concluded that a one-off cash outflow that would exhaust the Group's cash and cash equivalents and bank deposit balances in the assessment period was also remote.

Based on this assessment, the Directors have a reasonable expectation that the Group will be able to continue operation and meet its liabilities as they fall due over the period to 28 February 2025.

2. Segmental information

The Group manages its business in two segments, being Manufacturing technologies and Analytical instruments and medical devices. Within each operating segment, there are multiple product offerings with similar economic characteristics, similar production processes and similar customer bases. The results of these segments are regularly reviewed by the Board to allocate resources and to assess their performance. More details of the Group's products and services are given in the Strategic Report of the 2023 Annual Report.

In normal trading conditions, although future revenue is difficult to predict given that the Group's outstanding order book is typically less than three months' worth of revenue value, larger consumer electronics orders in the APAC region within the manufacturing technologies segment typically fall in the first or last quarter of the financial year. In addition, the Group typically experiences lower demand in August and December, and so revenue and operating profits are typically lower in the first half of the year. This information is provided to allow for a better understanding of the results, and management does not believe that the business is 'highly seasonal' in accordance with IAS 34.

There is no allocation of assets and liabilities to operating segments. Depreciation is included within certain other overhead expenditure which is allocated to segments on the basis of the level of activity.

The following table shows the disaggregation of Group revenue by category:

Aftermarket services include repairs, maintenance and servicing, programming, training, extended warranties, and software licences and maintenance. There is no significant difference between our two operating segments as to their split of revenue by type.

The following table shows the analysis of revenue by geographical market:

Revenue in the above table has been allocated to regions based on the location of the customer. Countries with individually significant revenue figures in the context of the Group were:

There was no revenue from transactions with a single external customer amounting to 10% or more of the Group's total revenue.

3. Cost of sales

4. Financial income and expenses

Currency gains and losses relate to revaluations of foreign currency-denominated balances using latest reporting currency exchange rates. Certain intragroup balances are classified as 'net investments in foreign operations', such that revaluations from currency movements on designated balances accumulate in the Currency translation reserve in Equity. Rolling one-month forward currency contracts are used to offset currency movements on remaining intragroup balances, with fair value gains and losses being recognised in financial income or expenses.

5. Taxation

The income tax expense in the Consolidated income statement has been estimated at a rate of 20.1% (H1 FY2023: 17.7%), based on management's best estimate of the full-year effective tax rates by geographical unit applied to half-year profits. This is comparable with the 20.0% reported in FY2023.

6. Earnings per share

The earnings per share for the six months ended 31 December 2023 is calculated on earnings of £45,177,000 (December 2022: £64,068,000) and on 72,719,565 shares (December 2022: 72,719,565 shares), being the number of shares in issue during the period. This excludes 68,978 shares (December 2022: 68,978 shares) held by the Renishaw Employee Benefit Trust.

7. Dividends

All shareholders on the register on 8 March 2024 will be paid an interim dividend of 16.8p net per share on 9 April 2024, resulting in a dividend payable of £12,228,475.

8. Property, plant and equipment

Additions to assets in the course of construction of £35,939,000 (December 2022: £17,363,000) comprise £25,685,000 (December 2022: £8,474,000) for freehold land and buildings and £10,254,000 (December 2022: £8,889,000) for plant and equipment. At the end of the period, assets in the course of construction, not yet transferred, of £83,553,000 (December 2022: £23,914,000) comprise £62,777,000 (December 2022: £9,707,000) for freehold land and buildings and £20,776,000 (December 2022: £14,207,000) for plant and equipment. This mostly relates to the expansion of our manufacturing facility in Miskin, Wales.

9. Intangible assets

As detailed in the 2023 Annual Report, the key assumption in determining the value-in-use of intangible assets are sales forecasts. Latest sales forecasts, and other factors which may impact the business plans, for relevant cash generating units have been reviewed for indicators of impairment at 31 December 2023. This includes an assessment of our discount rate based on prevailing market assumptions at 31 December 2023, which has remained at 10.7%. As a result, no impairments have been recognised in the six months to 31 December 2023 (December 2022: nil).

10. Financial instruments

There is no significant difference between the fair value of financial assets and financial liabilities and their book value in the Consolidated balance sheet. All financial assets and liabilities are held at amortised cost, apart from the forward exchange contracts which are held at fair value, with changes going through the Consolidated income statement unless subject to hedge accounting. The fair values of the forward exchange contracts have been calculated by a third-party expert, discounting estimated future cash flows on the basis of market expectations of future exchange rates, representing level 2 in the IFRS 13 fair value hierarchy. There were no transfers between levels during any period disclosed.

Credit risk

The Group carries a credit risk relating to non-payment of trade receivables by its customers and establishes an allowance for impairment in respect of trade receivables where recoverability is considered doubtful. In the six months to 31 December 2023, the Group has generally not experienced a deterioration in debtor repayments nor in the assumptions used in calculating allowances for expected credit losses. At 31 December 2023, total expected credit losses amounted to £4,170,000, (3.5% of gross trade receivables), compared with £3,348,000 at 30 June 2023 (2.7% of gross trade receivables).

Liquidity risk

The Group's approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, and the Group continues to use monthly cash flow forecasts on a rolling 12-month basis to monitor cash requirements. Cash and cash equivalents and bank deposits at 31 December 2023 totalled £178,258,000, compared with £206,388,000 at 30 June 2023. This reduction included a dividend payment of £43,195,000 and cash generation from operating activities of £55,570,000 during the period. In consideration of this, the Group remains in a strong liquidity position.

Market risk

The Group continues to mitigate market risk on cash flows using USD, EUR and JPY forward currency contracts. At 31 December 2023 the total nominal value of USD, EUR and JPY forward contracts held for cash flow hedging purposes was £414,873,000 (December 2022: £525,603,000). At 31 December 2023, there were no remaining forward contracts ineffective for cash flow hedging and yet to mature (December 2022: £21,950,000), with no additional forward contracts becoming ineffective for hedge accounting purposes in the six months to 31 December 2023. A decrease of 10% in the highly probable revenue forecasts of Renishaw plc and Renishaw UK Sales Limited, being the hedged item, would result in no forward contracts becoming ineffective at 31 December 2023.

11. Employee benefits

The net surplus of the Group's defined benefit pension schemes, on an IAS 19 basis, has reduced from a £57,371,000 asset at 30 June 2023 to a £9,038,000 asset at 31 December 2023. The difference largely relates to the insurance buy-in of the UK scheme, described below. The US scheme has now been fully terminated, and the Ireland scheme is in a deficit position of £90,000. The approach and methodologies used to calculate liabilities at 31 December 2023 are consistent with 30 June 2023.

During the 6 months to 31 December 2023, the Trustee of the UK defined benefit pension scheme undertook a buy-in and insured around 99% of the Scheme's liabilities by purchasing an insurance policy. This contract is effective from 19 October 2023 and is held in the name of the Trustee. The value of the contract is recognised as a Fund asset for the purposes of IAS19. In line with IAS19.115, for a buy-in insurance contract such as this, where the income received from the policy matches exactly the benefit payments due to the members it is covering, the value attributable to the contract to be recognised as an asset is the equivalent IAS19 value of the corresponding liabilities.

The value of the corresponding IAS19 liabilities for the members covered by the buy-in contract was calculated based on individual member data as at 27 January 2023, allowing for known deaths and transfer-outs between 27 January 2023 and 19 October 2023. The IAS19 liabilities in respect of the buy-in policy were lower than the transaction price of the insurance contract. Consequently, the value attributable to the insurance contract has reduced from the actual price paid, and the resulting remeasurement loss (or 'strain') is recognised in the 'Return on plan assets' item in the Consolidated Statement of Comprehensive Income and Expense. The IAS19 liabilities as at 19 October 2023 were £118,500,000. The final premium paid for the buy-in was £150,400,000, and therefore a loss of £31,900,000 has been reflected in the OCI.

Benefits in the UK Fund are subject to a DC underpin at the point of retirement or transfer out. Historically, this has been allowed for in the accounts in a consistent manner to current administrative practice and the triennial funding valuations. During the buy-in process, it was identified that the drafting of the DC underpin in the UK Fund Rules may require that the DC underpin is applied in a manner which is different to the administrative practice which has been applied. The Trustee and Company are currently seeking legal clarification and advice on this issue. No allowance for this matter has been made in the 31 December 2023 position, due to the uncertainty of legal treatment and therefore any potential impact on liabilities. This position will be reviewed at year-end. There is also uncertainly around the process required to resolve these potential issues, therefore a provision for legal fees relating to this have not yet been recognised.

Separately, in June 2023, the High Court ruled that certain historic amendments made to the rules of the Virgin Media pension scheme were invalid without the scheme's actuary having provided the associated S37 certificates necessary. This judgment has been appealed to the Court of Appeal, particularly the extent to which invalidity of past changes to the Virgin Media pension scheme's rules could affect associated benefit entitlements of members of that pension scheme. If upheld, the High Court's decision could have wider ranging implications, affecting other schemes that were contracted-out on a salary-related basis, and made amendments between April 1997 and April 2016. The UK Fund was contracted out until 5 April 2007 and amendments were made during the relevant period and as such the ruling could have implications for the UK Fund. However, as we are still awaiting a final outcome to the Virgin Media case, the possible implications for the Fund have not been investigated in detail at this stage. The Court of Appeal hearing for the Virgin Media case has been set for 25 June 2024. The Trustee and Company will continue to seek legal advice on the matter and act accordingly.

12. Alternative performance measures

In accordance with Renishaw's Alternative Performance Measures (APMs) policy and ESMA Guidelines on Alternative Performance Measures (2015), APMs are defined as: Revenue at constant exchange rates; Adjusted profit before tax; Adjusted earnings per share; and Adjusted operating profit.

Revenue at constant exchange rates is defined as revenue recalculated using the same rates as were applicable to the previous year and excluding forward contract gains and losses.

Adjusted profit before tax, Adjusted earnings per share and Adjusted operating profit are defined as the profit before tax, earnings per share and operating profit after excluding costs relating to business restructuring, and gains and losses in fair value from forward currency contracts which did not qualify for hedge accounting and which have yet to mature.

The Board considers these alternative performance measures to be more relevant and reliable in evaluating the Group's performance.