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Edited Transcript of RSW.L earnings conference call or presentation 30-Jan-20 9:15am GMT

Half Year 2020 Renishaw PLC Earnings Call

Gloucestershire Feb 5, 2020 (Thomson StreetEvents) -- Edited Transcript of Renishaw PLC earnings conference call or presentation Thursday, January 30, 2020 at 9:15:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Allen C. G. Roberts

Renishaw plc - Group Finance Director, Member of the Executive Board, Secretary & Director

* Chris Pockett

Renishaw plc - Head of Communications

* David R. McMurtry

Renishaw plc - Co-Founder, Executive Chairman & Chairman of Executive Board

* William Lee

Renishaw plc - Chief Executive, Member of the Executive Board & Director

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Conference Call Participants

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* Robert John Davies

Morgan Stanley, Research Division - Equity Analyst

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Presentation

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Chris Pockett, Renishaw plc - Head of Communications [1]

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Good morning, everyone. My name is Chris Pockett. I'm Head of Communications for the Renishaw Group, and I would like to welcome you to this live webcast presentation of Renishaw's interim financial results for the 6 months ended December 2019. Present in the room today are Sir David McMurtry, Renishaw's Executive Chairman, and today's main presenters: Will Lee, Chief Executive; and Allen Roberts, Group Finance Director.

As usual, before I hand over to Will, I'd like to go through some basic housekeeping for the event. After the presentation, which will last around 25 minutes, there will be a question-and-answer session in which we will try to answer as many questions as possible before we close at 10:15. No questions will be answered during the formal presentation. However, for those of you joining us via the web, you will be able to submit questions both during and after the presentation via the Ask A Question button you can see located at the bottom left-hand corner of your screen.

For those of you joining us via the conference call facility, you will only be able to submit a question at the end of the formal presentation (Operator Instructions). I should also point out that all financial information given during the presentation will be in pound sterling.

Thank you again for joining the presentation, and I will now hand over to Will.

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William Lee, Renishaw plc - Chief Executive, Member of the Executive Board & Director [2]

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Thank you very much, Chris. Good morning, everyone. So let's have a little look at the executive summary of what's been going on for the last 6 months. So to start with, we have seen the first half revenue down 14% at constant exchange rates of GBP 259.4 million. This was a reduction in all regions, the largest being APAC with a 20% decrease. Really, we need to understand and look inside what's going on to probably explain and shed some -- a little bit more light on that.

If we look to start with by the segmentation that we do, look inside the metrology area, you can see there, 13% overall reduction. Really, the big driver being the subdued markets that we're seeing for our industrial metrology products. By industrial metrology, we mean the machine tool probes, the CMM probes, the Equator gauging, all the stuff that is used to help our customers or end-user manufacturers manufacture productively high-accuracy parts. I'll talk more about that later on when we're looking at that area in particular.

The other thing we saw that in comparison to the first half of 2019, the -- that in that half, we had a number of orders from consumer electronics contract manufacturers over in APAC, we have not seen those in this year. What we are starting to see is a beginning of an upturn from the semiconductor market. We saw that first for demand for our laser encoder, which tends to be used in equipment at earlier stages in the semiconductor manufacturing processes. And more recently, the beginnings of an upturn for our optical encoder, which tends to be used in equipment used later on in the semiconductor manufacturing process.

In the healthcare segment, again, revenue was down 6%. We did see a growth in our neurosurgical robot, which led to an increased revenue for our neuro product line. Spectroscopy was down slightly but much to do with phasing in terms of particular orders and is relatively stable. Clearly, that came through strongly in our profit because of our relatively high fixed costs and high margins, so profit was down 76%. And you can see that, the breakdown between the areas of the business. As we've talked about, both in previous webcasts and in trading updates previously, we are very much looking at the productivity of the group and looking at our cost base.

So different stuff that we have been doing, in combination with looking better at prioritization and making sure we are focusing the excellent resources that we do have on projects that we think are going to make a real difference to the mid- to long-term profitability of the group, has also included some nonreplacement of staff who've left the business. We have, due to reduced demand, have a lower number of direct manufacturing staff now at our manufacturing facilities. We have consolidated also in terms of our additive manufacturing business, as we have already talked about. And we will be consolidating the design efforts down here in Gloucestershire and the manufacturing in South Wales with the planned closure February 2020 still on plan of Staffordshire. And we also, at the moment, our proposed U.K. redundancy program is ongoing with a -- we talk about a head count reduction of around 200 people across the U.K.

We've also seen, which Allen will go into in more detail, some longer term, particularly building projects, which are being completed either in the first half just completed or at the moment. So our expenditure CapEx has been higher this first half than it will be, and we will see significant reductions in the second half, which Allen will talk through in more details. With a strong balance sheet, cash of GBP 71.3 million, we have made a decision to maintain the interim dividend at 14p per share.

Right, I'm going hand over to Allen, who will talk through the financials in more detail.

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Allen C. G. Roberts, Renishaw plc - Group Finance Director, Member of the Executive Board, Secretary & Director [3]

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Thank you, Will, and good morning to everybody. As Will has just mentioned, we achieved a revenue in the first half of GBP 259 million, which was a fall of 13% over the last year or 14% at constant exchange rates.

Our adjusted profit before tax is GBP 14.3 million compared to GBP 59.6 million in the prior year. This gives a return on revenue of 6% relative to 20% for the previous year. The fall in profitability is largely due to a reduction in revenue. And in addition, we have seen an adverse net year-on-year movement of GBP 7.7 million across the financial income and financial expenses, most of which relates to currency volatility on our intra-group balances. We will talk more about that later.

Statutory profit before tax is GBP 9.9 million compared to GBP 61.6 million last year. The effective tax rate for the year is 25.3% compared to 15.6% last year. This increase is driven by a reduction in trading levels, which will adversely impact the Patent Box benefit in the U.K. and it also led to a GBP 800,000 impairment of a deferred tax asset. Excluding the impairment, the effective tax rate for the full year is forecast to be around 17%.

Earnings per share on an adjusted basis at 15.1p and 10.2p on a statutory basis. An interim dividend in line with last year of 14p per share will be paid on the 6th of April to shareholders on the register at the 6th of March 2020. All directors have waived their right to the interim dividend, resulting in a dividend payable GBP 4.8 million this year compared to GBP 10.2 million last year.

This profit bridge shows the movements that reconcile the adjusted profit before tax of GBP 59.6 million to last year to GBP 14.3 million this year. I will cover these items in more detail shortly after summarizing significant items. The largest by far is a GBP 38 million fall in gross margin, largely as a result of the lower revenue.

The cost of sales percentage increased by 4% to 38% mainly due to an under-recovery production costs following the slowdown in demand compared to last year. Whilst we have reduced the production cost base where necessary, the profit effect of these reductions will be more pronounced in the second half. Certain elements of the production cost base are fixed in nature and do not move in line with revenue changes.

As previously mentioned, the adverse net year-on-year movement of GBP 7.7 million across the financial income and financial expenses relates mainly to currency volatility on intra-group balances. Last year, financial income included currency gains of GBP 5.3 million compared to currency losses of GBP 2.5 million this year reported in financial expenses. To mitigate the significant income statement volatility we saw in the first half last year, a number of intra-group loans were reclassified as permanent investments in December 2018 whereby gains and losses from currency movements on such balances now accumulate in the currency reserve. Additionally, one-off month forward contract swaps are used to mitigate remaining balances. And we also had a GBP 2.7 million gain arising from a fair value adjustment of a convertible loan option in an associate company.

Onto the income statement. I've already covered the revenue gross margin and we'll cover other elements of the group cost base shortly. We continue to report our alternative performance measures, which include adjusted profit before tax and adjusted earnings per share. As in earlier years, gains and losses from forward contracts, classified as ineffective in the statutory results, are excluded from adjusted profit. This year, the group is incurring significant restructuring costs as we undertake actions to reduce the group's cost base and these restructuring costs are also included from adjusted profit. These alternative performance measures are the basis by which the Board evaluates group performance.

Due to the challenging trading conditions faced, we are taking a number of actions to improve productivity and reduce the group's cost base. These include the nonreplacement of staff who have left the business, reductions in direct manufacturing staff in the U.K., Ireland and India, planned closure of Staffordshire site in February '20 with activities consolidating Gloucestershire and South Wales, as Will has already alluded to. And we are taking a hard look at other variable group-operated costs across the organization.

The group now employs a total of 4,781 (sic) [4,871] people, which represents a net decrease of 170 from last June and a reduction of 106 in the U.K. and 64 overseas. Earlier this month, we also commenced formal consultation with our U.K. employees on a proposed redundancy program that could lead to a head count reduction of around 200 people, approximately 6% of our total U.K. employees.

Our commitment to research and development remains the core strategy for the business. In line with other areas of the business, we have taken steps to reduce costs whilst increasing productivity. This year, we have net engineering spend of GBP 46.1 million, down 4% compared to last year, which represents 18%, as you can see on the top-left chart of this slide. On the bottom left of the chart, we see distribution costs, which include sales and marketing expenditure and are up by 3% to GBP 65.6 million. Increases due to inflation and currency effects are being partly offset by reductions in head count. On the top right, in terms of our administration overheads, there's been an increase of GBP 2.9 million to GBP 31.9 million, which includes a GBP 2 million charge due to the impairment of intangible assets. As with production overheads, the profit effect of the actions taken to reduce the group's cost base will be more pronounced in all areas in the second half of the year.

Moving on to the balance sheet. I'll cover property, plant and equipment and cash separately. The right of use of assets is a new balance sheet item arising from the implementation of the new accounting standard, IFRS 16, and it shows assets of GBP 13 million and lease liabilities, both current and noncurrent. The assets comprise mainly leased properties and vehicles around the group.

Inventory balances have reduced by GBP 11 million since June '19, reflecting our management of inventory during a period of reduced demand. And we do expect to see inventory balances reduced in the second half of the year also. Debtors have decreased by GBP 20 million since June '19, primarily due to the reduced trading levels. Creditors have also reduced due to lower trading activity and lower bonus accruals compared to June 2019.

Net derivative balances, which represent the fair value of foreign currency forward contracts and options yet to mature, now total GBP 4 million net liability compared to GBP 51 million net liability in June '19. This decrease arises mainly from the strengthening of sterling against the hedge currencies over the last 6 months.

Pension scheme deficits now total GBP 43 million compared to GBP 52 million at June '19. Strong asset returns and total contributions of GBP 7 million have been partially offset by a reduction of 0.3% in the discount rate used for the U.K. DB pension scheme IAS 19 calculations.

Net deferred tax assets now total GBP 20 million compared to GBP 29 million at June '19, with a decrease reflecting the reductions in both the pension scheme deficits and net liabilities on derivatives. Net assets equal to total equity has grown by GBP 7 million to GBP 590 million.

Now turning to cash flow. The cash flow bridge tracks the movements of our opening cash balances of GBP 107 million to the closing position of GBP 71 million. Our profit after tax is GBP 7 million, together with noncash items totaling GBP 29 million, gave a cash inflow of GBP 36 million.

We've seen a further net GBP 14 million cash inflow from changes in working capital, with the decrease in debtor and inventory balances more than offsetting a reduction in the payables. Significant cash outflows included a net capital expenditure of GBP 27 million, R&D capitalized of GBP 8 million and dividend payments of GBP 34 million.

To finish our results overview, a few words on capital expenditure during the first half. Total capital expenditure was GBP 28.4 million, of which GBP 20.8 million related to property. The major additions were the extension to our Innovation Centre in Wotton-under-Edge, Gloucestershire, which is nearing completion; the acquisition of property in Pune to provide capacity for our future growth; the refurbishment of the building purchase in Nagoya at the end of last fiscal year; and the construction of a new facility in Michigan, USA, for use by Renishaw Fixturing Solutions who have outgrown their current leased facility. It's worth noting here that practically all of those developments are very, very near to completion.

Expenditure on plant and equipment for the period was GBP 7.6 million. We do expect capital expenditure in the second half of this year to reduce significantly compared to the first half.

Now back to you, Will.

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William Lee, Renishaw plc - Chief Executive, Member of the Executive Board & Director [4]

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Thank you very much, Allen. So let's have a look through some of the areas of the business in a bit more detail and see what's been going on. So to start with, as I mentioned earlier, so within our metrology business, industrial metrology has been operating in a weaker market environment at the moment. And our orders from the machine tool builders, CMM builders who supply into this industry are down at the moment because the shipments are down. I think that the good news from a medium-term point of view here is, there is -- that those are common drivers that we talk about of the needs for the end users' manufacturing staff are still very much there and are challenges that will get stronger over time in terms of increasing component complexity, tighter tolerance, and I'm going to talk a little bit about some new products that we've launched to help end users there.

Very much, this theme that we've been talking about for a while of measurement at the point of manufacturer, not waiting a week between manufacture and inspection, getting your metrology on the shop floor, is becoming more and more prevalent and more common in terms of what's been talked about. And again, I'll look at some stuff that we've been doing there. And again, with labor costs rising, the increased need for automation and our strategies and thoughts there, too.

So if we -- let's start with in terms of performance measuring. So actually checking that the machine tool is correct. What we've been very strong on is with our calibration equipment to check a finished machine is performing accurately. We've just complemented this with our XK10 alignment system, which allows machine tool builders or a range of equipment builders to check the machine tolerances as it is being constructed. So it very much compensates with the existing technology that we have, it's something that our existing salespeople can sell to our existing customers. So it's another product that they have. What we've also launched is some new software. So where we have pushed and more and more verification and calibration of a machine is now moving towards not just 1 degree of freedom, but multiple degrees of freedom where our XM-60, which we've talked about before, measures all these degrees of freedom simultaneously, we now have very simple and easy to use compensation software, which allows you not just to check your machine, but very easily to compensate it and automate it to make it actually better as well.

So the next area, if we look at in terms of then shop floor measurement, of making at the point of manufacture, then I've talked in the past on our RMP400, which we launched recently, which is taking our high-accuracy strain gauge technology, our ultra-robust radio transmission technology and also putting it into our smallest compact, 40-millimeter diameter probe. That's made a real difference. And actually, it's being really well received now in the market. And it's allowing us to gain new business. That's also being complemented then with our new NC4+ Blue. So this is rather for checking the part. This is for checking the tool. This is now pushing the metrology performance on with this. Using -- moving from a -- migrating from red laser to blue laser, allowing us to minimize our diffraction-limited spot, which allows us really to look at very small tools. It allows us to minimize air consumption. It allows us to really minimize the tool-to-tool variations. It's pushing the metrology up, keeping the ease of use and taking a step change there on the performance of our equipment. So again, positive feedback from a number of machine tool builders that we're working on with this technology.

The other area here, again, software is really important of actually the vast information that you're getting at the point of manufacture from our sensors is making it easy to get that data off. And with our Reporter app, you can either see that locally by the machine or centrally in the management office, real-time data coming off the machine.

Now also from an automation point of view, we have talked about the benefit of our equipment of saying traditionally that you may have an inspection station for doing geometric. And in the past, we've talked about then separate stations for doing surface finish. The benefit of REVO, when we launched the surface finish measurement probe was that you could do both of those at one position. So rather than saying put automation in to eliminate the need for manual labor there, actually, we're saying do it on the same platform, utilize the multi-sensor functionality of REVO.

We recently launched now a new sensor head for REVO, which is a fringe probe, which allows real high-accuracy, high-end surface aerial measurements to be done. So what we can now do is increase the flexibility of the CMM with the REVO head on it, allowing more stuff to be done, minimizing labor costs without the need actually for putting in additional automation in there. This has been really well received, particularly in the aerospace industry, where now you can do a combination of touch and surface measurement altogether.

So moving on. Still within the metrology area, position measurement. So these are a range of position feedback devices from extremely high accuracy with the laser encoder, down to the lower accuracy with magnetic. What we talked about here was that the reduced demand over the last 18 months or so due to reduced investment seems to be changing. The picture on the right, one of our laser encoders, and that's the area where we've seen the most increase in so far. Again, here, the nice thing is there's real demands pushing forward the need for newer technology. One of the big drivers here that we talk about is the size of the actual encoder. The ATOM is our smallest encoder. And you can imagine that in the depths of a complex bit of equipment, actually, the space that -- the smaller this readhead is, the more compact you can make the design of your machine and that space is very expensive where often these encoders go.

So the ATOM has proven to be a very popular readhead. The traditional ATOM that we have so far gave an analog signal, which either required an interface box to digitize it or electronics from our customer to do that. We've now integrated in our own custom ASIC, which I've talked about from other encoders in the past, into the ATOM. So the ATOM now gives direct digital quadrature. No need for an interface box, all in an extremely small platform.

Another strong driver in our precision measurement range is actually the need for functional safety. So as encoders are going into more and more platforms then some of those, including such things, very sensibly, as medical robots, collaborative robots and a range of other applications, are requiring stuff that's guaranteed safe and is certified safe. So the functional safety specs, which it really is going through a very controlled design process and being able to certify, we now have in the absolute encoder that you can see on the left, the RESOLUTE, which is there with a functionally safe, certified with a BiSS interface. And our TONiC encoder on the right, known as the TONiC FS, which is certified as the incremental, but is certified safe for those applications as well.

So moving on to additive manufacturing. So here, we are talking about laser powder bed fusion, which is the technology that we use, which allows our customers using these machines to make some really unique special parts, which allow real value to be added.

What we're looking at is with the 500Q machine that you can see on the left, is pushing that and bringing down the cost per part and the productivity of the machine with the multi-laser technology. What we've also seen from this machine is real developments in terms of the part quality and the process stability with the innovation that we put in. This has now been morphed and utilized in a product that we've recently launched, which is the 500E, so this is much more either for newer users developing their AM understanding. It brings the same benefits in terms of part quality, process stability that you get with the Q. It's only single laser, though, so it's very much more designed for beginner users or also research users who want the flexibility of being able to change from one powder to another but still that really high quality and also the sensor technology, whether that's optical or acoustic that you've -- we've developed for the Q.

In terms of the use of additive manufacturing, really interesting times with the benefits in terms of not just the parts that can be made coming through, but the other benefits in terms of actually reducing costs and speeding up processes. And this is really well illustrated with the work that we've been doing with BAE Systems, who are doing some fascinating development. David and I have visited them recently to see what was going on. And you can see, and they very eloquently explained the a, the excellent parts they're getting working with our 500Q machine, but also the real benefits that this gives to them for their manufacturing environment.

So we've signed a collaboration agreement, and we're using the benefits of their understanding of the needs, our innovation and the new stuff that we have, not just now but coming through for the future, to explore the options that are there for us.

It's another interesting time. So if we move on to health care within our Raman spectroscopy business. I've talked in the past of our desire to move what is very much an R&D piece of equipment to the production shop floor with the launch of the 800-series, which is now out there and doing well.

We've also launched another new product, which is the Virsa Raman equipment, which again is there to be more portable. What we're taking is actually a Raman enterometer, we're fiber coupling it to a remote probe. This opens up 2 new opportunities for us. The first is those things that just weren't suitable for going in the inVia. And you can see here some work we're actually doing at the moment with the V&A museum. This is actually a pheasant, and they're looking at it and they can tell, look at the analysis of the pigments in there, which is useful for authentication and repair. So that work's ongoing at the moment on a number of different pieces there.

Many different applications there, but you can see with size of that part and what we're trying to do, the fiber optic makes something that wasn't really possible before. With our equipment, possible. It also opens up another new market for us with actually people integrating our Raman equipment onto their own equipment and selling it, so more like many of our other probing businesses and OEM sale, where we will supply to equipment manufacturer and then they ship it on. So you can see the bit of equipment on the right, which will end up going into the semiconductor market as another channel of market for us.

Brexit, less topical at the moment with situations. But to clarify that actually the -- everything is done from us. This is a picture of our new warehouse over in our Dublin facility. So existing manufacturing facility. We now have that in place over in Ireland. That is active, shipping and we have also put in additional safety stocks there. So that if any disruptions happen in the future because our supply to our customers is so critical to allow them to ship their high-value equipment on, that we have maintained safety stocks at high levels at the moment due to any uncertainties that might be going on.

So from an outlook point of view, as we talked about, we expect trading conditions, particularly in the industrial metrology area, looking it to remain challenging for the rest of this financial year. Long-term prospects, we are excited about and confident about and from the people that we have and the exciting products that we have for the future and the drivers in those markets that we're in. We have released guidance for the year of GBP 530 million to GBP 560 million for turnover and our adjusted profit before tax of GBP 50 million to GBP 70 million.

Okay.

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Questions and Answers

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Chris Pockett, Renishaw plc - Head of Communications [1]

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Okay. Thank you, Allen and Will. So we're now going to move to questions. We have around 30 minutes remaining, so I'm going to split the questions as ever as evenly as possible between webcast and conference call. And -- but as usual, there are more people on the webcast than the conference call. So I'm going to start with some of those webcast questions.

Throughout, we'll try to group similar questions together, so we may not answer specifically all individual questions. And we're going to start, so obviously, very topical. We're going to start with a couple of questions we've had on the coronavirus.

So we're going to start with first question from [Michael Moises]. Michael asked, do you expect the coronavirus to have a significant impact on your world trading? And what actions are being taken to minimize the related growing restrictions on world travel? Do you have a good supply of virus-protective face masks?

And I think, Will, you're going to start with that one?

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William Lee, Renishaw plc - Chief Executive, Member of the Executive Board & Director [2]

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Yes. Thank you. So look, our #1 priority is clearly with the staff. We're putting in place travel guidance and restrictions, whilst we monitor the situation here, and we are frequently on the phone with our APAC management team regarding this. So there's a few questions. There's another question then on what impact it's going to have on trading, which I think is hard to really know at such an early stage. I guess the immediate thing to note is that our guidance and expectation is that in terms of some of these exceptional one-off sales, we don't have anything at all significant forecasted in for the rest of the year there.

So where, in terms of consumer electronics supply chains, minimal impact there at the moment. I guess if this gets really bad, then in terms of supply of equipment into China and needs there, then that's going to hit everybody hard. But I think it's very -- much too soon to really comment on what that would do for the global economy.

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Chris Pockett, Renishaw plc - Head of Communications [3]

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Okay. Does anybody else want to add to that?

Okay. There's been a couple of questions around the redundancy program and general head count reduction, first of which is from [Stephen Timoney]. And he asks or states the U.K. compulsory redundancy program appears to be at odds with management's historic emphasis on long-term investment over short-term profitability. Does the scale of these redundancies have precedent in the group's history? And could you assure us that they will not impact the group's longer-term prospects?

Will is going to start with that one.

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William Lee, Renishaw plc - Chief Executive, Member of the Executive Board & Director [4]

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Yes, if I start. So in general discussions we've been having as the Board has been in terms of the productivity of the group and driving that forward and making sure that we are prioritizing and doing what's critical for the group. Clearly, it's been regrettable that actually with how market conditions are and what we're looking at doing, that has resulted in a number of compulsory redundancies, which is very regrettable, particularly for the staff involved. But it is looking at making sure, I think, the conservative nature that we've always taken of making sure that we have a lot of cash in the bank and are prepared for whatever might happen in the future, that we are in a good place then going forward. So it's making sure we are productively investing for the future with exciting R&D programs that we have.

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David R. McMurtry, Renishaw plc - Co-Founder, Executive Chairman & Chairman of Executive Board [5]

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So this is not the first time we've been through these downturns and I think the important thing is to make sure that we've got the right people in the right place to drive the new products so that we can take advantage of the upturn. And it's -- we've been through many of these, and the upturn has been very good to us in the past.

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Chris Pockett, Renishaw plc - Head of Communications [6]

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It's worth just commenting on [Preston] as well, specifically because obviously in 2009, we had a large scale...

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William Lee, Renishaw plc - Chief Executive, Member of the Executive Board & Director [7]

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Yes. So this -- I mean, the scale of this recently, although, clearly, if you are in fact an employee, this doesn't make it any better, but actually, as Allen said earlier, this is 6% of the U.K. workforce. So compared to things that we have done in the past, back in 2009, this is only relatively small, which we think reflects the downturn and the upturn that will happen at some point in these industry cycles.

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David R. McMurtry, Renishaw plc - Co-Founder, Executive Chairman & Chairman of Executive Board [8]

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Yes. We've just got to now concentrate in getting the right people to get the future products out.

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Chris Pockett, Renishaw plc - Head of Communications [9]

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Okay. And I believe, hopefully, that's answered Sonia Fasolo's question as well, which is similar on head count as well.

So we're going to move now to a couple of questions around additive manufacturing or often known as 3D printing. So this question is from Mark Davies Jones. And it's about a 4- or 5-part question, actually. So please, could you comment on the development of the additive manufacturing business line, particularly in the light of the decision to close the Stone facility? Is the commercial take-up of this product line proving slower than anticipated? And do the group believe that additive manufacturing can ultimately deliver similar levels of profitability to those of the traditional metrology business? And to conclude, the market and cost structure of that business appears to be quite different from earlier Renishaw areas of focus.

Will, do you want to...

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William Lee, Renishaw plc - Chief Executive, Member of the Executive Board & Director [10]

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Yes, if I start -- and then I'll -- I'm going to hand over to David for some of the bits. So look, the first thing in terms of the Stone facility, we took a decision that it was the right time with the launch -- the successful launch of the Q product that -- to look at the productivity of the business and co-location for taking it forward. A very tough decision to make, excellent people in Stone, but we decided that the best route forward was to have a co-located design team working together and a co-located manufacturing team. Pleased that a number of people have moved down from Stone and have strengthened our team here, and we have some very exciting plans, which David will touch on in a bit, in terms of taking the technology and the products forward.

I think you can see from a commercial -- actually let's do the last question bit first, the marketing cost structure. Look, this is a different business for us. Clearly, these are lower-volume, high-price complicated bits of equipment, which is a very different model to a probe or an encoder. But it's still very much selling into the manufacturing. It's similar customers and it's people that we understand the entire manufacturing process and can talk to them, therefore, from a knowledgeable point of view on the benefits that additive has and how it complements traditional manufacturing.

So yes, it is a different model for us, and it's one that we are learning and developing as we go. As we do technology development, there's also a commercial learning there, too.

In terms of the commercial take up, very much that seems to be migrating into -- we have some quite advanced users of additive manufacturing working very closely with us taking multiple systems, which are very much then looking at the integration and development and the benefits this brings to the business. And there are also customers that are more at the earlier stages of that process.

So we feel we have some very nice accounts there that are developing to a point that will be the healthy business going forward for the long term. The -- I think the exciting stuff is actually having got the current new generation of product through, then it's what the design team -- David has been spending a lot of time with the design team, and there's some really interesting now new stuff that they're looking at to really take the business forward.

Did I say anything confidential?

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David R. McMurtry, Renishaw plc - Co-Founder, Executive Chairman & Chairman of Executive Board [11]

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Okay. No, no. Yes, it's a very interesting marketplace and it's very broad. But the areas -- it's also quite an expensive for a part manufacture -- market space at the moment, which the price per part has to come down in all areas, but we are focusing on the top end of the market, where precision of the component is a priority. But also, the reliability of the process, and because of our precision and also our areas that we've got in the other business that focus into this, we're in a very good place for the next generation of machine, which we're now laying the keel for, which is to dramatically reduce the part cost and greatly increase the precision of the component of. And that's why we are sticking to the, really, the top-end market, (inaudible) [British] aerospace type of marketplace. And I think the next generation of machines will be very interesting, and that should be the turning point from a cost-effectiveness point of view.

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Chris Pockett, Renishaw plc - Head of Communications [12]

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Okay. Thank you, David. And we also have a question from -- where has it gone? Oh, here. Sorry. So there's a question from [Thomas Ritson]. And similarly on additive segment. There's no mention of 3D printing sales in the update cited as good growth in the Q1 update, any further detail on the segment at this stage?

And another part to this question. Also, can you provide some color on the margin sort of mix impact on the metrology business in the event that traditional product sales decline and sales of 3D printing solutions increase?

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William Lee, Renishaw plc - Chief Executive, Member of the Executive Board & Director [13]

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Okay. So I first want to -- I don't think we mentioned good growth in our Q1 update for additive. Additive has certainly not seen the challenge that the underlying market has for AM at the moment. But I don't believe that we said that.

So yes, we see a relatively stable for 3D printing at the moment. Sorry, can we -- in terms of providing specific detail on margin mix impact, we don't. I think the bit that's really important for me here, though, is this question and assumption that for us, our traditional businesses are ones that have huge potential, too.

So I think in the event of that, that decline, our investment, our assumption very much is that the market drivers that we've talked about. There are wonderful opportunities for both of those areas of the business, the traditional probing and also the additive manufacturing.

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Chris Pockett, Renishaw plc - Head of Communications [14]

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Okay. Thank you, Will. There's a question here from [Joseph Savarti]. He's an independent investor, and he asks why have the directors waived their rights to the interim dividend? While a noble, generous and much-appreciated act, could you please explain what brought you to make such a rare act in the investing world?

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David R. McMurtry, Renishaw plc - Co-Founder, Executive Chairman & Chairman of Executive Board [15]

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I think the Board felt it was inappropriate to take -- the directors to take the dividend as we're going through this redundancy program. But also, we've done this before, and I know you brought this up with me in the past before. But we really -- we're just conserving the cash, which we would really want to keep going, so we can make sure that we're safe as we go and put it into the new products areas.

Do you want to add on to that?

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William Lee, Renishaw plc - Chief Executive, Member of the Executive Board & Director [16]

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No, it sounds a perfect answer to me.

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Chris Pockett, Renishaw plc - Head of Communications [17]

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Okay. Thank you for that, David. We have a question now was -- again, a 3-part question. But the first part of which deals with currency. It's a question from Jonathan Hurn, Barclays. The first part of the question, you state in your outlook that second half PBT should benefit from a favorable FX impact from forward contracts and reduced operating expense. Could you quantify these benefits, please, in monetary terms?

Second part of the question, what do you see -- actually, we've already covered that. So that's, that was dealing with coronavirus. So I think, hopefully, Jonathan, we've already answered that.

And then part 3 of his question, is the revenue decline or volume, or is there also pricing pressure across your product range? I think, Allen, you're going to...

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Allen C. G. Roberts, Renishaw plc - Group Finance Director, Member of the Executive Board, Secretary & Director [18]

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Yes. I'll pick up on the currency. Yes, there should be a favorable foreign exchange impact in the second half, primarily because the contracts, because of the nature and the length of the contracts that we put in place, we have now ended the pre-Brexit exchange rate contracts, which were -- as you probably recall, currency has a dramatic impact post-Brexit referendum. And so all those contracts are now in the past and finished. So there are, I think, more favorable rates going forward into the second half. We may be talking about GBP 5 million to GBP 6 million depending on what the currency -- actually, as of today's rates, depends on actually how the currencies move over the next 4, 5 months.

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William Lee, Renishaw plc - Chief Executive, Member of the Executive Board & Director [19]

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Thanks, Allen. So if I pick up the pricing and the revenue question then. So look, the -- we have always faced pricing pressure at Renishaw across the board. There's nothing new there. We do our best to innovate, to support our customers, to make sure that we are minimizing any pricing erosion and by bringing out new products. We negate, and we do our best to make sure we maintain our margins.

I think to say all volume, I can't categorically say that absolutely everything to do with the revenue decline was volume, but certainly, the vast, vast majority is just that our machine tool builder customers are shipping less product and they are, therefore, buying less from us to go into those products.

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Allen C. G. Roberts, Renishaw plc - Group Finance Director, Member of the Executive Board, Secretary & Director [20]

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I'll just pick up -- I did pick up on the foreign currency. In terms of the operating expenses, we are, as I said in the introduction, we are looking for a more pronounced impact of reduced costs in the second half. And we're talking of the order, maybe GBP 7 million to GBP 10 million.

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Chris Pockett, Renishaw plc - Head of Communications [21]

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Okay. Thanks for that, Will and Allen. There's a question again from [Stephen Timoney], and it's relating to Japanese machine tool orders. So preliminary Japanese machine tool order data for December suggests a potential trough in this market. Is this something you track and take into account in your cost-reduction plans for the year ahead?

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William Lee, Renishaw plc - Chief Executive, Member of the Executive Board & Director [22]

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So absolutely, we look at the JMTBA data. I think for those looking at this over the last 6 months, see a pretty depressing -- actually, the facts on the order intake, the facts on the shipments have been low. I guess we are -- everyone is -- and when we talk to the machine tool builders, everyone is -- and has different views on when those numbers will start to improve. But I mean, in a way, that is us starting to speculate as to are we at the bottom of the trough? Where are we? Are we going along the bottom? I think, honestly, with these things, we don't know. The machine tool builders are probably closer to it than we are, and we're speaking to them. They're not sure either. So I'd hate to speculate on something which I'm not sure on.

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Chris Pockett, Renishaw plc - Head of Communications [23]

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Okay. Thanks, Will. There's another question here from Mark Davies Jones, generally dealing with trends in the metrology business and regional trends. So how have regional demand trends evolved through the first half for the metrology business? Are there signs of stabilization across the APAC region or just in the semiconductor-related product lines? And has this been offset by deterioration in areas such as Germany and the U.S. through the period? And finally, any indication you can give of how you expect the regional picture to develop through the second half would also be helpful, particularly given recent developments in China.

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William Lee, Renishaw plc - Chief Executive, Member of the Executive Board & Director [24]

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It would be very helpful. Yes. Look, stabilization across APAC. Certainly, APAC was the first to go down, I think as we commented on in the past. I think we can convince ourselves in a number of different directions there on where that's going to go over the next few months.

The positive news that we have communicated, which I think we can talk about stuff which we know is definite, and we have seen definite signs of recovery in our shipments to people supplying into semiconductor manufacturing. I think I prefer to keep to specifics and facts that we know there.

Clearly, German machine tool builders are suffering with exports to China and some which are very focused on sort of traditional powertrain suffering as well. The U.S. has been up and down.

So -- and as a -- how it goes forward, regionally, individually, not sure, and what impact the recent developments in China are going to have, assuming that's referring to the virus. Again, I think it's very early to say on what impact on the global economy that's going to have.

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Chris Pockett, Renishaw plc - Head of Communications [25]

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Okay. Thanks, Will. Now you're going to have an extensive question here or a series of questions from Will Turner at Goldman Sachs. Can you go into more detail about what is causing the weakness in Europe and U.S.? What do you assess is temporary, for example, being related to aerospace sales or anything more concerning about, for example, automotive, internal combustion engine-related sales?

Second part of the question, in recent weeks, have you seen any falls from purchases in China following the coronavirus outbreak? It's a slightly different question to that which has been posed before in relation to coronavirus.

Third part, in context of a weaker industrial environment and its capital intensity, has additive manufacturing performed in line with your expectations? Are you working on a new 4-laser product launch anytime soon?

The fourth part of the question with regards to the employee reduction plan, if markets recover over the next 6 to 12 months, which some people expect, are you taking out costs at the wrong time? If you were to put costs back in, are they more likely to be outside the U.K. given your property investments?

Okay. Where do you want to start with that? Will, do you want to?

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William Lee, Renishaw plc - Chief Executive, Member of the Executive Board & Director [26]

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Yes. Okay. So why don't we pick off at point 2, to start with? I think we've touched on a bit of 1 already, but I can go back on it. So clearly, this has also coincided with Chinese New Year, with offices being shut over there and now being -- by government dictate, Mainland China ones being shut for longer. So tricky to say on that exactly because we have had a pause there because of offices being shut anyhow. But I don't believe so, from what we've seen, in terms of our customers trying to manufacture and get products made, I can touch on the semiconductor stuff there again, where manufacturers are still plowing on with those orders to make sure they are shipping to their end users.

In terms of the first question, I think we've talked about, to some degree, if I may be -- the aerospace stuff, I think we still see as relatively healthy in terms of pushing up the efficiency of the engines, both from an additive manufacturing point of view and a metrology point of view. Clearly, there's this transition, and we've talked about this before from the automotive point, with really limited investment in new IC engines, but still retrofit and upgrade in terms of upping the performance of existing lines where our technology, whether it's sprint, machine tool scanning or REVO can make a difference, but also interesting developments and lots of talks with customers about what are the metrology challenges that they have now with the new technology that they need to develop for electrification. And then clearly -- but that's at a very early stage of most manufacturers. There's a long way to go in terms of optimizing the performance of those developments.

So additive manufacturing has -- I think we knew this was going to be a relatively -- well, a long-term investment for us, working with these capital-intense key accounts. This is something that takes time, which we have the patience to develop. We're very pleased with the development of the technology that we are doing, the parts that we are making, and that is now coming through roughly in line with our expectations.

I'll let David talk about anything new for the future. But I think that's...

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David R. McMurtry, Renishaw plc - Co-Founder, Executive Chairman & Chairman of Executive Board [27]

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Yes. And obviously, we are working on higher-output machines for the future. It's essential obviously, and we don't want to give too much away, but clearly, we are certainly -- believe we can do a very good job at the top end.

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William Lee, Renishaw plc - Chief Executive, Member of the Executive Board & Director [28]

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And then with regards to question 4, then clearly, we -- in terms of shipping to our OEM customers, if their markets turn up a bit of recovery over the next 6 to 12 months, then our manufacturing flex is on, number one, making sure that we're on top of that, which we monitor very closely. And we may well need to recruit more manufacturing direct resource at that time. We try and make as much automated and flexible for the high-volume products that go in there.

In terms of where we would put cost back in, then that pivot comes under careful consideration of where we want to invest in the business. It's one of our challenges always -- it's one of the great things that we have with the Renishaw business and one of our challenges is with so many opportunities is working out the best place that we should invest our capital for the future.

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Chris Pockett, Renishaw plc - Head of Communications [29]

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Okay. Take a question here from Robert Davies. Could you give some sense of your relative exposure between something of semicon, automotive, machining, smartphone spending from an end-market standpoint?

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William Lee, Renishaw plc - Chief Executive, Member of the Executive Board & Director [30]

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So I'll pick this up. If I can pick this up to start with and see if Allen and David want to add anything.

I mean one of the interesting bits is, clearly, we've always been nervous on giving too much information out on some of these things. The honest, interesting thing is that because our route to market for a lot of our products is we will sell a component to a machine tool builder or a CMM builder, we will technically support them and make sure they get excellent service and support. But actually, we will normally not know where that probe encoder or whatever it is, ends up. It's only often with a higher-complexity metrology challenge on something quite new, so maybe when we're looking at one of our new sprint probes and working with the machine tool builder to support them delivering a complex solution to the market that we'll really know what the end use is.

Or if it's something where we are actually promoting our technology directly to them, and then that falls through a sale of machinery and our equipment directly with us. So one of the downs -- it's a lovely market to have because, actually, it's a low-cost -- a low distribution cost, and it works well. But we do get less understanding of actually where our -- a lot of our product ends up.

Anything to add on that, David or Allen?

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David R. McMurtry, Renishaw plc - Co-Founder, Executive Chairman & Chairman of Executive Board [31]

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No. So that's a no.

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Chris Pockett, Renishaw plc - Head of Communications [32]

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Okay. I'm going to go back on AM, there are a couple of more questions. I know people are waiting patiently on the conference call, we will come to you, but there's a lot of questions this morning. And obviously, we want to try and get through as many of those as possible. There's a question here from Lacie Midgley. Does the development and introduction of a new single-laser system in the 500E suggest that you have seen a reduction in commercial AM use to more R&D among your customers?

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William Lee, Renishaw plc - Chief Executive, Member of the Executive Board & Director [33]

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So it's a no. So look, what we had here, we had the -- the RenAM 400 was our previous machine for R&D flexible use. When we launched the 500Q, the big marketing push on that was its productivity. But the bit it also came with was a real step of performance in the gas flow and the quality of the parts and the metrology inside. What we had there and users were saying, well, I want not the speed and the productionization of the Q, but I do want the quality of the parts that are coming off it right across the bed. So that's where we've taken the benefits from the Q and to put them into a flexible machine for the E. So that's the rationale in there, it's taken the performance benefits not to do with productivity from the Q and put them into a flexible entry-level and R&D machine. If that answers that question.

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Chris Pockett, Renishaw plc - Head of Communications [34]

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Okay, great. Thank you, Will. Specifically a question for David now. This is from [Ian Keeley]. And Ian asks, is it now time for Renishaw to halt dental and health care, as these divisions have never shown scalable size and related profit over the last 15 years, but appear to take a disproportionate amount of top management time?

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David R. McMurtry, Renishaw plc - Co-Founder, Executive Chairman & Chairman of Executive Board [35]

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Yes. I think now I've handed this over to Will. But I think there's some truth in what you're saying there.

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William Lee, Renishaw plc - Chief Executive, Member of the Executive Board & Director [36]

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I think if we look at -- so dental was the reason we got into additive manufacturing. The dental stuff is much broader than that, but it has changed and is actually very much now are selling our AM equipment into health care markets in the particular skill set. So that has changed.

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David R. McMurtry, Renishaw plc - Co-Founder, Executive Chairman & Chairman of Executive Board [37]

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This is broader, I think.

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William Lee, Renishaw plc - Chief Executive, Member of the Executive Board & Director [38]

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Yes, the spectroscopy...

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David R. McMurtry, Renishaw plc - Co-Founder, Executive Chairman & Chairman of Executive Board [39]

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It's -- you carry on. Sorry, Will.

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William Lee, Renishaw plc - Chief Executive, Member of the Executive Board & Director [40]

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No, no. You go.

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David R. McMurtry, Renishaw plc - Co-Founder, Executive Chairman & Chairman of Executive Board [41]

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No. I think you're -- certainly, we've got into additive, and additive is still a very important part of the dental side of health care. And we are also in that long-term drug delivery system, which is a long -- still in a long road, and much of the problem has been the problem of very costly to keep going. And we are now addressing the best way to take this into the future. I don't know what you want to say any more than that.

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William Lee, Renishaw plc - Chief Executive, Member of the Executive Board & Director [42]

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Yes. So well, the work Allen and his team has been doing is a setting up, actually, our neuro business as RNS, which is a vehicle that we have talked about now with others and saying this is something as a vehicle for taking that forward.

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David R. McMurtry, Renishaw plc - Co-Founder, Executive Chairman & Chairman of Executive Board [43]

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We're giving this business quite an attention to see what we really should be doing with it.

I think that is the answer to your question.

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Chris Pockett, Renishaw plc - Head of Communications [44]

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Okay. Thank you. Here's a question from [John Thisten]. I believe at one time, you were supplying equipment on a partnership basis on a pay-as-you-use basis, what percentage of business does this represent? Is it a major or increasing supply route? How do you see the future of medical? I think we've probably touched on that already, in which area will be the most promising. Thank you, John, for your question.

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William Lee, Renishaw plc - Chief Executive, Member of the Executive Board & Director [45]

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And this is a minimal...

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David R. McMurtry, Renishaw plc - Co-Founder, Executive Chairman & Chairman of Executive Board [46]

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Yes, very small.

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William Lee, Renishaw plc - Chief Executive, Member of the Executive Board & Director [47]

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Yes. So yes, insignificant.

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Chris Pockett, Renishaw plc - Head of Communications [48]

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Okay, all right. Next, we have a question from Henry Carver. Thanks for the question, Henry. He's from Peel Hunt. And to what extent does the Boeing build rate slowdown affect the metrology business?

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William Lee, Renishaw plc - Chief Executive, Member of the Executive Board & Director [49]

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Sorry, I think I'd probably go back to one of my previous questions here in terms of, actually, our exposure to a lot of these end users is that much less than a machine tool builder would be. So I -- hard for us to impact -- I would say still the investment that we see in aerospace on engine metrology is still keeping good. So I -- nothing overly from that.

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Chris Pockett, Renishaw plc - Head of Communications [50]

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Okay. Well, I think we have got through all of the questions that have currently been submitted via web. So I'm now going to move to the conference call and give the people on the conference call an opportunity to ask questions. There's nothing obvious queued up at the moment, but I'll ask Molly, who is today's call operator, to see if there are any questions.

So over to you, Molly.

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Operator [51]

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(Operator Instructions) We don't have any questions in the queue.

(Operator Instructions) The first question comes from the line of Robert Davies calling from Morgan Stanley.

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Robert John Davies, Morgan Stanley, Research Division - Equity Analyst [52]

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I just had 1 around really sort of forward visibility. And when you're looking across different parts of your business, different regions, I guess, when you're talking to your sort of sales and managers in different parts of the world. What are the sort of first signs of things getting better or worse in those different regions? How much forward visibility do you get from your customers in those conversations? And what are you sort of really looking for as the sort of first indication things might be getting better or worse?

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William Lee, Renishaw plc - Chief Executive, Member of the Executive Board & Director [53]

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Okay, if I -- well, that does touch on the one we've talked about with semiconductor. With some customers, we'll get a bit of visibility. So particularly on some of the laser encoder stuff, which is higher value, we tend to get some forecast. And as I said that, that's an area that we have seen definitely a real upturn in.

Often with the encoder stuff, we get much, much less visibility. I think primarily there, it's because actually, the customers that we're supplying to are struggling to get visibility as to what business they're getting through. And they generally -- they don't know quite what's happening in the market.

From a machine tool side, I would say, still at the moment that there's a greater uncertainty amongst all the machine tool builders. So as we touched on earlier, when our salespeople around the world are discussing, we're getting a sense, but I say that sense at the moment is probably still one of uncertainty from customers, and that's pretty much across the different regions.

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Operator [54]

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We have no further questions coming through on the phone lines. So at this point, I will hand the call back over to you, Chris.

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Chris Pockett, Renishaw plc - Head of Communications [55]

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Okay. Thanks very much, Molly. We have no further questions via the web either. So that now ends the Q&A session, and indeed ends this morning's webcast and teleconference event.

As ever, we will aim to publish a recording of this event on the Investor selection -- Investor Relations section of our website at the end of today.

So just on behalf of Renishaw, I'd like to thank you all for attending this event, and hopefully, it's been valuable to you. And finally, just a reminder that you can download the interim report and a copy of the financial presentation that you've just seen from the IR section of our web.

Again, thank you for attending, and have a good day.